Advance Decline Sentiment

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Patent #: US 7,831,984 B2
MarketVolume®'s technology of displaying and presenting intraday volume and volume based technical indicators is protected by copyright law and patent. Unauthorized distribution or reproduction of proprietary technologies will be prosecuted to the maximum extent possible under the law.

In some cases in Breadth technical analysis, misleading information can arise and a false signal can be generated when the focus is set on advance decline issues only. The advance/decline (AD) theory of technical analysis was developed at a time when volume and advance decline volume data for indexes and exchanges were not available. At that time, analysis was focused on advance/declines issues (number of advanced and declined stocks) only. Today, when a wide range of data is available, the volume of advancing and declining stocks is considered to be as important as the number of advancing and declining stocks themselves.

In a case in which only AD issues are analyzed, there could be a situation when the AD issues analysis indicates a strongly overbought or strongly oversold condition. However, AD volume analysis does not support the results of AD issues analysis. In this case, a wrong trading decision can be made if it is based solely on an analysis of the number of issues.

As an example, if the AD issues ratio is extremely low (below 0.1), it indicates a strongly oversold condition. However, if at the same time, the AD volume ratio is not at a similarly low (below 0.1) level, it would indicate that, despite the fact that the majority of stocks in the index's basket are traded below yesterday's close, the main trading activity is focused on the group of advancing stocks. Furthermore, despite the fact that the most stocks are in decline, there is no panic selling and such a situation cannot be considered to be panic bearish trading or a strongly oversold condition. Only when both the AD volume and AD issues ratios are at extremely low (below 0.1) levels, could it be considered as panic selling that pushes the index (market) into an oversold condition where the index (market) tends to become predisposed to change its trend from down-trend to recovery. Only when both the AD Volume and AD Issues are at high, positive (above10) levels, strong greedy buying, which may push the index (market) into an overbought condition, is indicated.

As you can see, combining the analysis of advance/decline volume and issues data can deliver more precise results. Following the belief that the volume and issues should be analyzed together, our team (MarketVolume®'s team) has developed the AD Sentiment indicator, which combines advance decline volume and issues analysis in a single tool. The AD Sentiment formula is:

Where:

AI is the advanced issues (number of advanced stocks)
DI is the declined issues (number of declined stocks)
AV is the advancing volume (summary volume of advancing stocks)
DV is the declining volume (summary volume of declined stocks)

Chart 1: S&P 500 Index (^SPX) - AD Sentiment

The AD Sentiment indicator oscillates around 50% and moves in a range between 0 and 100%. The AD Sentiment readings close to 0% may indicate a strongly oversold condition and the AD sentiment readings close to 100% may indicate a strongly overbought condition. Since AD Sentiment reading are in a range between 0 and 100%, it give the ability to use this indicator in technical analysis and a trading system in the same way as Stochastics is used.

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