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The ADL is one of the overall market indicators. Appropriately, the ADL is used to analyze an index, a sector or a specific group of stocks.
The ADL indicator shows a difference between the rising and falling stocks in the market. The idea behind it is simple, because a trend is healthy if as many shares of the index as possible move in line with the trend. The ADL is intended to show possible divergences to the price sale.
ADL faster than the index
Occasionally the ADL even functions as a precursor to the market. The longer an uptrend goes on, the more likely it is that individual stocks will not be able to generate new highs. The distortion between the ADL and the price trend becomes even greater if individual stocks in the market have a very high index weighting based on their market capitalization. A current example is with Google or Apple in the NASDAQ100 index. Bullish heavyweights can pull an index upwards even though the overall market is already tending towards weakness. However, the weakness is then made abundantly clear by the ADL as a bearish divergence. The same system is of course available in reverse form for a downtrend.
ADL = (sum of the increased individual values) –
(sum of the fallen single values)
Sample calculation for the DAX: The DAX has 30 shares. If 25 stocks rise and 5 fall on one day, the ADL value for the day is +20. The ADL is shown visually as a cumulative graph.
The ADL is primarily a trend indicator
A comparison of the ADL with the index is important for forecasts. Every high in the upward trend or every low in the downward trend should be confirmed by the ADL. If divergences arise, these are harbingers for a later market reversal. At least, however, a pause in the trend should result from the divergence.
The upper chart shows a bullish and a bearish divergence. If you place simple trend lines on the tops or bottoms, the degree of inclination will reveal the divergence.
An ADL with volume
An ADL can be calculated not only from the difference of increased fallen shares. There is also an “ADL volume”. In this case, an ADL volume is the difference between increased and decreased trading volumes. The calculation is similar to that of the OBV indicator. The trading volume gets a positive sign if the stock has risen. If the stock falls, the trading volume is negative.
The ADL volume has little effect in the technical analysis. If it is used, then mainly divergences between ADL and ADL volume are sought in order to assess the market afterwards.