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Market Breadth (Advance-Decline Line)

Market breadth, measured by the Advance-Decline Line is a measure of overall market momentum or strength. It is the cumulative sum of the number of advancing issues minus the number of declining issues, calculated on a daily basis. To correct for the increasing number of issues that appear on an exchange such as the NYSE over the years, the daily difference can be divided by the number of issues traded each day.

Naturally, it moves higher when there are more advancing issues and lower when there are more declining issues; that is how it measures the strength of the market. The A-D Line for the NYSE generally provides a good measure of overall market strength, since it is calculated for the largest equities marketplace in the world with over 3,000 companies represented. This indicator is considered bullish when it is greater than one (more advancing issues), and bearish when it is less than one (more declining issues).

A trend reversal may be signalled by a divergence, which is characterized by advancing prices in the face of a declining A-D line, or falling prices in the face of an advancing A-D line. Thus, if the market is up but there are more declining issues than advancing issues, it is a sign that the market is losing its momentum. The A-D Line should trend in the same direction as the market. When the A-D Line peaks ahead of the market, it alerts you to declining market breadth and predicts a drop in prices.

One of the most popular market indicators based on smoothing of the A-D line, is the McClellan Oscillator and Summation Index.

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