【What is a Advance Decline Line】Explaining How to Interpret the AD Line

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torkey
torkey

Hello, I’m Torkey and I invest in stocks as a hobby.

This article will explain the Advance Decline Line (AD Line) used in stock investment.

【Contents of this article】
  • Learn more about AD Line
  • You can see the sites where AD Line can be viewed
  • You can understand the precautions of AD Line
  • Learn about negative divergence

【Explanation on how to read AD Line】

The AD Line is a line created by adding up the number of rising stocks and the number of falling stocks among the stocks that make up the target index (S&P 500 and NASDAQ).

How to read AD Line

〈AD Line is rising〉

It shows that a wide range of stocks are rising.

A state where the market has momentum

〈AD Line is falling〉

It shows that stocks that pick up breadth are falling

The market has no momentum

The AD Line is drawn based on the accumulation from the past, so you can see the current momentum of the stock market by looking at the AD Line.

【If you want to see AD Line, go to “Market In Out”】

Quoted from Market In Out

If you want to watch AD Line, I recommend “Market In Out“.

With “Market In Out,” you can check not only the three leading American indices “S&P 500,” “Nasdaq,” and “NY Dow,” but also the AD Line of the mid- and small-cap index “Russell.”

Please use this as a reference when investing in US stocks.

【Points to note about AD Line | Phenomena observed when stock prices are at the ceiling】

Basically, AD Line moves in conjunction with index stock prices (S&P 500 and NASDAQ).

If the index stock price rises, the AD Line will also rise.

However, you need to be careful when the AD Line falls first even though the index stock price is rising.

This phenomenon can be seen when stock prices are at their peak.

【AD Line marks the end of the bull market】

A short dip in the AD Line is a phenomenon that always occurs at the end of a bull market.

When a few stocks with strong momentum falter, the entire stock market suddenly falls.

In other words, the AD Line is an effective indicator when determining the ceiling of the stock market.

Negative divergence is when the stock index remains high and the AD Line immediately begins to decline.

Cases where negative divergence has appeared in the past

〈1970s〉

Nifty fifty market price

〈1999-early 2000s〉

dot com bubble

〈2022〉

Inflation remains at its highest level in 40 years

【Learning from negative divergence】

The Nifty-Fifty market in the 1970s, when a negative divergence occurred, is very similar to the market environment in 2022.

Let’s review what happened in the Nifty-Fifty market to learn from the past and apply it to the present.

What is Nifty Fifty?

Nifty-Fifty means “50 wonderful stocks.”

Nifty-Fifty is a group of powerful growth stocks that drove U.S. stocks in the 1960s and 1970s with the tailwind of monetary easing.

〈1970|Nifty Fifty〉

In the early 1970s, Nifty-Fifty stocks had a P/E ratio of 60 times. Other stocks have a P/E ratio of 11 times, and some stocks with momentum are pushing up their stock prices. At the time, stock prices were rising on the back of monetary easing, but when the market environment changed to monetary tightening due to inflation concerns, growth stocks that had high expectations plummeted across the board. At this time, the AD Line turned dark one step ahead of the stock price, sending a signal that the stock price would plummet.

〈2020|High inflation after coronavirus〉

In order to restart the economy from the 2020 novel coronavirus pandemic, the U.S. government has implemented monetary easing policies. As a result, the S&P 500 achieved spectacular results with three consecutive double-digit growth rates. However, in 2022, inflation will remain at its highest level in 40 years, prompting large-scale and rapid monetary tightening. The IT companies that have been driving US stocks (GAFA and FANG) have been performing poorly, and their stock prices have fallen sharply one after another.

torkey
torkey

〈Learning from the past〉

The stock market in the 1970s and in 2022 are quite similar.

History repeats itself.

Get into the habit of checking AD Line next time you find yourself in a similar situation.

【Check out the top stocks in the S&P 500 and NASDAQ 100】

Learning from the Nifty-Fifty market, in addition to AD Line, you should also check the momentum of the highly weighted stocks that make up the index.

The indexes that represent the United States are the S&P 500 and NASUDAQ.

Quoted from JTG Securities

We will introduce 10 stocks with high ratios among the stocks that make up the S&P 500.

These 10 stocks alone account for approximately 31.3% of the S&P 500.

Quoted from JTG Securities

We will introduce 10 stocks with high ratios among the stocks that make up the NASDAQ100.

These 10 stocks alone account for approximately 48.9% of the Nasdaq 100.

In particular, NSADAQ is an index that is sensitive to the economy, as it mainly focuses on the high-tech sector.

If you want to know the current state of the US economy, check out the NASDAQ AD Line.

【summary】

I have explained AD Line (Advance Decline Line).

AD Line is such a useful indicator that some technical analysts claim that “AD Line symbolizes the broadest range of market movements.”

Please refer to this article and take advantage of AD Line for stock investment.

torkey
torkey

Let’s deepen our understanding of stock investment together and enjoy stock investment for a long time.

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