THE HAndbook of TECHnICAl AnAlysIsfigure 22.2 NYSE Summary of Market‐Breadth Components.
The historical indicator extreme levels may be used although the absolute
readings may differ from another Advance Decline Line indicator that started
its running total from a different date. The absolute level readings of historical
extremes are not important, as long as it remains consistent with respect to past
action.
The basic Advance Decline (AD) indicator is just the difference between the
number of daily Advances and Declines. The Advance Decline Line is a daily run-
ning total of the differences between Advances and Declines. In Figure 22.3, we
observe reverse bearish divergence between time lines 1 and 2, as well as between
1 and 3, as the NYSE index makes lower highs while the NYSE AD Line makes
higher highs. This is bearish for the NYSE index and we see the market fall just
after time lines 2 and 3. We also observe standard bullish divergence at point X
between the NYSE AD Line and the NYSE index. The NYSE index rose rapidly
thereafter. The overbought levels on the NYSE Net Advances window indicator
coincides fairly accurately with the market tops, as seen at time lines 1, 2, 3, and 4.
Figure 22.4 displays numerous divergences between the NYSE index and
its AD Line. We see the divergences working very well in forecasting turns
in the NYSE. Again, price confirmation is required whenever divergence is
employed.
Figure 22.5 displays the Energy Select Sector SPDR Advance Decline Percent.
This is the ratio of the AD difference over the total number of issues in the ETF,
that is, (A − D)/T. In this example the Advance Decline Percent is smoothed by
a five‐day simple moving average. We observe that a test of the historically over-
bought level accurately coincides fairly accurately with the various smaller and
larger market tops in the Energy Select Sector SPDR ETF.