ADVANCE / DECLINE ratio indicator

ADVANCE / DECLINE ratio
Overview
The Advance / Decline Ratio ("A / D Ratio") shows the ratio of advancing issues to reduce the issues. It is calculated by dividing the number of advancing issues by the number of declining issues.
Interpretation
A / D Ratio is similar to the Advancing-Declining issues showing the breadth of the market. But where Advancing-Declining issues subtracts the advancing / declining values, A / D Ratio divides the values. The advantage is that the ratio remained constant, regardless of the number of issues traded on the New York Stock Exchange (which has a permanent increase).
A moving average of the A / D Ratio is often used as an overbought / oversold indicator. The higher the value, the more "excessive" the rally and the greater the likelihood of correction. Also, low readings imply oversold market and suggest a technical rally.
Keep in mind, however, markets that appear to be extremely overbought or oversold can stay that way for some time. When investing using overbought oversold and indicators, it is wise to wait for prices to confirm your belief that change is due before placing your trades.
From day to day fluctuations of the Advance / Decline Ratio are often eliminated by smoothing the relationship with the moving average.
You can see that prices generally declined following the entry into overbought level above 1.25 ("sell" arrows) and that they usually gathered after entering the oversold level below 0.90 ("buy" arrows).
Calculation
A / D Ratio is calculated by dividing the number of stocks that advanced in price on the number of shares that declined.