Advances And Declines

Advances and declines refers to the number of stocks that closed at a higher and lower price than the previous day, respectively. Technical analysts look at advances and declines to analyze stock market behavior, discern volatility, and predict whether a price trend is likely to continue or reverse. Typically, a market will be more bullish if more stocks advance than decline and vice versa.

Advances and declines form the basis of many different technical indicators, including the advance-decline ratio, the advance-decline index, and the absolute breadth index. For example, a low advance-decline ratio can indicate an oversold market, while a high advance-decline ratio can signal an overbought market. Either of these conditions could mean that a market trend has become unsustainable and is about to reverse.

Often times, traders combine the advances and declines indicators with other forms of technical analysis. A great example would be looking at momentum indicators, like the relative strength index (RSI) or moving average convergence-divergence (MACD) for a divergence, and then looking at advances and declines as a confirmation that a trend change is beginning to occur.

There are many different technical indicators that are calculated using advances and declines:

• Advance-Decline Ratio - The Advance-Decline Ratio, or ADR, compares the number of stocks that closed higher against the number of that closed lower during a particular period (and can be used across many timeframes). 
• Advance-Decline Index - The Advance-Decline Index, or ADI, is a market breadth indicator that represents the total difference between advancing and declining securities within an index. 
• Absolute Breadth Index - The Absolute Breadth Index, or ABI, is a technical indicator that's based on the differences between advances and declines on an index. Unlike the prior two readings, the ABI ignores the direction that prices are going and instead focuses purely on the differences to measure volatility.

Here's an example of the Advance-Decline Line for the S&P 500 SPDR ETF (SPY):

These indicators are generally interpreted in the same way: Rising values tend to indicate a bullish market and falling values tend to indicate a bearish market. For example, the above chart shows a rising Advance-Decline Line reading between December and mid-January, which suggested that advances outpaced declines during the uptrend. The only exception is the ABI that measures only volatility and not direction. Often times, the ABI is interpreted by taking a moving average of the reading and looking for significant trends, which can show rising and falling volatility trends.

Chart courtesy of TradingView.com.