Advance/Decline Ratio Oscillator

Description
The Advance/Decline Ratio Oscillator (ADRO) is a variation on advance/decline data studies in that it is a) less concerned with daily changes advancers against decliners, b) excludes upside and downside volume, and 3) accounts for total market volume beyond the NYSE.   The ADRO is mainly interested in trend, based on the daily ratio of advancers against decliners.  Therefore, it doesn't really matter how heavy or light volume may be on a given day; what matters is the ratio of up stocks to down stocks, and the ratio between them.  This allows for some consistency in studying the patterns.  

A/D data has a strong sentiment connection, in that it allows us to quantify stocks up v.s. stocks down.  The ratio is about as close as you can get to applying a Put/Call methodology to stocks.  In developing the ADRO, I studied several years of A/D data, and the one persistent pattern has been the tendency for near-to-intermediate tops to follow when the indicator is above 4.00, and near-to-intermediate bottoms to follow when the indicator is at -2.00 or below.  Tops and bottoms have been signaled either well ahead of the market, or at the same time.  

Like all momentum based indicators, crossovers of the zero line are important, and distance from it reflects maturity of trend.  A 6-month and 3-yr chart are provided for comparisons.

One anomaly that I hasten to point out, is the few occasions when the ratio is rising, although the market is generally trending down.  I find this tends to occur during periods of high volatility, and wide intraday price swings in the averages.  For example, on a day that has a huge gap up opening, that then sells off later in the day (something that's not unusual in a bear market).  There's is probably also a psychological factor at work.  The A/D Line itself, for instance, topped in 1998, and was trending down throughout the final stages of the market bubble.

As a timing tool, the ADRO can be useful, but given this very occasional anomaly, it should be used and confirmed by other indicators.

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Market Participation Index

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Relative Upside/Downside Volume Oscillator

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NASDAQ Composite Relative Upside/Downside Volume Oscillator

Advance/Decline Ratio Oscillator

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