Advance Decline Line (ADL)
The Advance Decline Line measures the number of individual stocks participating in a market rise or fall
The ADL is a stock market indicator used by speculators to measure the number of individual stocks participating in a market rise or fall. Price changes of large stocks can have a disproportionate effect on capitalization weighted stock market indices such as those of NYSE and NASDAQ. It would be good to know how broadly this movement extends into the larger market of smaller stocks.
In a particular stock market index the ADL is a plot of the cumulative sum of the daily difference between the number of issues advancing and the number of issues declining. So it moves up when the index has more advancing than declining issues, and vice versa. The formula for ADL is:
A/D Line = (# of Advancing Stocks – # of Declining Stocks) + Yesterday’s A/D Line Value
- Divergence happens when the stock market index moves in one direction while the ADL moves in the opposite
- In such a case, if the index goes up while the ADL goes down, the index might mislead us about the true direction of the market overall.