Decline ratio

Decline ratio (Advanced/decline ratio) is an indicator of the degree to which securities perform in market movement. It shows the relations between rising and falling securities. If this indicator achieves severe values ​​at a certain level, the direction of market prices is expected to reverse (G. Yioryalis 2004, p. 57).

"The advance/decline ratio is the result of dividing the number of advancing issues by the number of declining ones, based on weekly or daily NYSE figures" (J.G. Siegel 2013, p. 32).

It can show market strengths and weaknesses. Also, we can figure out if the trend is going to continue. This ratio is an indicator of momentum and could show if the market is overvalued or underestimated. The investor can calculate the moving average of the advance/decline rate to suggest if the market is (J.G. Siegel 2013, p. 32):

• Overbought - A high A/D ratio (more than 1.25) could mean this scenario happens, and a possible correction has been made.
• Oversold - A low rate (less than 0.75) may mean a sold-out market and impending growth.

"A moving average of the A/D ratio - that smoothes the ratio's daily fluctuations - must be studied together with a market index, since the former is an indicator for the entire market. Keep in mind that sometimes most securities may be declining while the market index is advancing (and vice versa). For example, the majority of the 30 shares in the Dow Jones Industrial Average (DJIA) index may be driving the index upwards, while the majority of the New York Stock Exchange securities is declining, along with the A/ D ratio. A rationale for this is that shareholders hold on to the 30 well known and usually in good financial position companies in the DJIA index longer than they hold on to other firms. Likewise, while the A/D ratio, along with most securities, is declining, the Standard and Poor's 500 index (a weighted average of the market capitalization of the 500 largest companies) may be driven upwards by a few large-cap stocks" (G. Yioryalis 2004, p. 57).

Formulas

"Cumulative Advance-Decline Ratio (CADR) is a cumulative sum of the daily advanced/decline ratio

$CADR_{t}=CADR_{t-1}+ADR_{t}$

$ADR_{t}={\frac {adv_{t}\ -\ dec_{t}}{adv_{t}\ +\ dec_{t}\ +\ unch_{t}}}$

$CADR_{t}=Cumulative\ Advance/Decline\ Ratio\ advance\ for\ day\ t$

$ADR_{t}=Advance/Decline\ Ratio\ for\ day\ t$

$adv_{t}=NYSE\ advancing\ issues\ for\ day\ t$

$dec_{t}=NYSE\ declining\ issues\ for\ day\ t$

$unch_{t}=NYSE\ unchanged\ issues\ for\ day\ t$"

(Market Technician's Association 2017, p. 544).

NYSE - New York Stock Exchange

Decline ratio — recommended articles

Uptrend — Chande Momentum Oscillator — FOREX trading strategies — Overbought oversold indicator — Bull flag — Net Volume — Three white soldiers — Capped Index — Osma

References

• Frangos C. (red.) (2013), Proceedings of the 3rd International Conference: Quantitative and Qualitative Methodologies in the Economic & Administrative Sciences (Q.M.E.A.S. 2013), Technological Educational Institute of Athens School of Economy and Administration Department of Business Administration, Athens
• Market Technician's Association (2017), CMT Level II 2017: Theory and Analysis, John Wiley & Sons, New Jersey, p. 544
• Siegel J.G. i in. (2013), International Encyclopedia of Technical Analysis, Routledge, New York, p. 32
• Yioryalis G. (2004), Technical Analysis for Beginners, Pagefree Publishing, Otsego, p. 57

Author: Radosław Cieślik