Advances And Declines

What Are Advances and Declines?

Advances and declines refers generally to the number of stocks (or other assets in a particular market) that closed at a higher and those that closed at a 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 over some timeframe.

Understanding Advances and Declines

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.

Advances and Declines Indicators

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

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, which 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.

Below is an example of the advance-decline line for the S&P 500 SPDR ETF (SPY) as it appeared in May 2018. It appears as the blue line graph plotted below the candlestick chart.

As you can see, the number of advances relative to declines is increasing through May, when it reaches a maximum, perhaps indicating a bull rally to come soon. Indeed, as we now know, the market did rise through the second half of 2018 and into 2019.

Image by Sabrina Jiang © Investopedia 2021