Lesson 3 - Advance Decline Line & Chart Construction

Range Trading is not a good idea because

1) Rnges dont last forever

Net Advances

NA=Number of Advancing Stocks−Number of Declining Stocks

• Positive NA → More stocks increased in price than decreased.

• Negative NA → More stocks decreased in price than increased.

Advance-Decline Line (AD Line)

• A cumulative measure of Net Advances.

• It rises when Net Advances are positive and falls when they are negative.

• Used to confirm market trends and detect divergences.

Advance / Decline Line Interpretation

measures the degree of participation in an advance or a decline.

An AD Line that rises and records newhighs along with the underlying index shows strong participation that is bullish. An AD Line that fails to keep pace with the underlying index and confirm new highs shows narrowing participation.

the market is considered weak when

he AD Line moves to new lows along with the underlying index

Bullish divergence forms when

the AD Line record a higher low along with the index. This means fewer stocks are declining and the decline in the index may be nearing an end.

Bullish Divergence signs

The index makes a new low but the A/D Linemakes a higher low. It is a signThe index makes a new low but the A/D Linemakes a higher low. It is a signal that fewerstocks are participating to the downside and thatthe market MAY be ready to change trend.al that fewerstocks are participating to the downside and thatthe market MAY be ready to change trend.

The ad line records an even lower low than what the index does

Bearish Divergence

The index makes a new high but the A/D Linemakes a lower high. It is a signal that fewer stocks are participating to the upside and thatthe market MAY be ready to change trend.

The high on the A/D Line is lower than the high on the market index."

Line Chart

Plot price over time. Price is on the y-axis; time is on the x-axis. The mostrecent data is on the right

● Useful for studying long-term trends

● Good for comparing two or more markets at the same time

● Delete useful information

Bar Chart

The horizontal axis of a bar chart represents the passage of time (with the most recent time periods on the right side) while the vertical axis represents the stock's price.

● Plot price over time. Price is on the y-axis; time is on the x-axis. The most recentdata is on the right.

● Uses the high, low and close of the day. Sometimes the opening price is used as well.

● Shows you the trading range for the day

● Adds information: gaps, range, where is the close within the range, etc...

● Data becomes cloudy when looking at long-term trends

Candlestick Charts

A form of Japanese charting that has become popular in the West. A narrow line(shadow or wicks) shows the day's price range. A wider body marks the area betweenthe open and the close. If the close is above the open, the body is white (not filled); if theclose is below the open, the body is black (filled).

● Plot price over time. Price is on the y-axis; time is on the x-axis. The most recentdata is on the right.

● Uses the open, high, low and close of the day. Plots four data points per timeperiod. Similar to bar charts but for the body.

● Shows you the trading range for the day● Adds information: gaps, range, where is the close within the range, if the close isbelow the open, etc...

Point & Figure Chart

Shows price changes of a predetermined size. This can be a dollar amount or apercentage. The P & F Chart does not take time into consideration in the traditionalsense.● The smaller the price increment used, the more sensitive the chart will be. Thelarger the price increment used, the less sensitive the chart will be. One is better forshorter-term analysis, the other is better for longer-term trends.● A new "box" is added when the tradable moves by the defined amount, in thedirection of the prevailing trend.● A new column is added when the tradable "reverses" by a defined amount multipliedby the original "box" size.● Reversals are usually 1 box or 3 box reversals.

Scaling

On a logarithmic scale chart, the vertical spacing between two points corresponds to the percentage change between those numbers. Thus, on a log scale chart, the vertical distance between 10 and 20 (a 100% increase) is the same as the vertical distance between 50and 100. Because these charts show percentage relationships, logarithmic scaling is also called" percentage" scaling.

It is also called "semi-log" scaling because only one of the axes (the vertical one) isscaled logarithmically.

On an Arithmetic (Linear) scale chart, the spacing between each point onthe vertical scale is identical. Thus, the vertical distance between 10 and 20 is the same as the verticaldistance between 90 and 100. While this kind of scaling is intuitive and easy to recreate by hand, linearscaling should not be used on charts with large vertical ranges. A move from 10 to 20 is much better thana move from 90 to 100, but on a linear scale, they both appear the same.

How Do Chartists Use the AD Line?

• They compare it to the actual index’s performance.

• A rising AD Line confirms an advancing market, while a falling AD Line confirms a decline.

• Bullish or bearish divergences in the AD Line may signal a trend reversal.

How is the AD Line Updated?

A/D Line (previous value) + Net Advances = Updated AD Line.

What Does the AD Line Measure?

• The degree of participation in a market move.

• Strong participation (rising AD Line) is bullish, while weak participation (failing to confirm new highs) is bearish.