If there are more advancing issues than declining issues, the market is said to be strong or having good breadth. New highs in the index have tended to lead peaks in the market. When the line is breaking out to the upside one can usually expect the market pick up in the next few months.

Because the number of issues listed on any of these exchanges has expanded greatly in recent years, a simple plurality of advances over declines will give greater weight to more recent years so a better way to look the numbers is to use a ratio.

The A/D line is a leading indicator and will peak before the major averages because of two reasons. First because interest rates peak before stock prices by about 9 months, then interest rate sensitive stocks tend to peak before the rest of the market and pull down the A/D line. Secondly, some industries peak before others as the economy cools off and these industries and sectors will drag down the A/D line before the rest of the economy.

By discarding market direction, the ABI functions as an "activity index." High values indicate market activity and change, while low readings indicate a lack of change. Fosback has noted historically high values typically lead to higher prices three to twelve months later. One highly reliable variation of the Absolute Breadth Index is to divide the weekly ABI by the total issues traded. If after a ten-week moving average is calculated and readings are above 40%, they are said to be very bullish. Readings below 15% are bearish.

The Absolute Breadth Index is calculated by subtracting the number of declining issues from the number of advancing issues and taking the absolute value of the difference:

With the Accumulation Swing Index attempting to show the "real market," it closely resembles actual prices. This allows usage of classic support/resistance analysis on the Index. Typical analysis involves looking for breakouts, new highs and lows, and divergences. The summary of the calculation for the Accumulation Swing Index is:

Step-by-step instructions on calculating the Swing Index are provided in Wilder's book, New Concepts In Technical Trading Systems.

The signals for the Accumulation/Distribution Line are fairly straightforward and involve divergence or confirmation. A bullish signal is given when the Accumulation/Distribution Line forms a positive divergence. Be wary of weak positive divergences that fail to make higher reaction highs. A two-week positive divergence should be suspect. However, a multi-month positive divergence deserves serious attention.

The Accumulation/Distribution Line can also be used to confirm the strength or sustainability behind an advance. In a healthy advance, the Accumulation/Distribution Line should remain up or at least move in an uptrend. If the stock is moving up at a rapid pace, but the Accumulation/Distribution Line has trouble making higher highs or starts going sideways, buying pressure is relatively weak.

The Accumulation/Distribution Line can at time have problems detecting subtle changes in volume flows. The rate of change in a downtrend could be slowing, but it may be impossible to detect until the Accumulation/Distribution Line turns up. This drawback has been addressed in the form of the Chaikin Oscillator or Chaikin Money Flow.

The A/D Line is calculated from the running total of advancing stocks minus declining stocks. Designed to measure the strength of the market, a sector or industry, it makes the basic underlying assumption that as long as there are more advancing issues than declining issues, the market remains strong. While a stock index is a composite of stock prices, the A/D Line is a composite of stock movement. This gives the daily A/D Line a downward bias relative to the weekly A/D Line and the price-based indices. This downward bias is a result of the average stock tending to have as many up days as down days, but ultimately the gains will tend to accumulate faster than the losses.

The A/D Line can function as a measure of overall market strength. When more stocks are advancing than declining, the A/D Line moves up. When declining stocks outnumber advancing stocks the A/D Line will move down.

Many feel that the A/D Line shows market strength better than the more commonly reported Dow Jones Industrial Average (DJIA) or the S&P 500 Index. Studying the trend of the A/D Line can illustrate if the market is in a rising or falling trend, if the trend is still intact, or how long a current trend has prevailed.

The A/D Line can also be used to spotlight a divergence between itself the DJIA or a similar index. Often, an end to a bull market can be predicted when the A/D Line begins to round over even while the DJIA is trying to make new highs. Historically, when a divergence develops between the DJIA and the A/D Line, it is the DJIA that has changed direction and moved in the direction of the A/D Line.

Information provided by John Murphy, author of Technical Analysis of the Financial Markets and The Visual Investor.

This indicator's value is demonstrated by its ability as an overbought/oversold indicator. When the indicator moves towards its upper limits this is inidcative of a overbought situation and implies a correction may occur soon. When the indicator is towards its lower limits this is indicative of an oversold situation and suggests a technical rally is due. Day-to-day fluctuations of the Advance/Decline Ratio are often eliminated by smoothing the ratio with a moving average.

The formula for the Advancing-Declining Issues is simple:

If a fund produced the expected return for the level of risk assumed, the fund is said to have an Alpha of zero. A positive Alpha indicates a return greater than expected for the risk taken. A negative Alpha indicates the manager has not adequately rewarded investors for the risks taken.

where:

n = number of observations
b = Beta of the fund
x = rate of return for the benchmark index (often, but not always, the S&P 500)
y = rate of return for the fund

The Jensen Alpha is equal to the Investment's average return in excess of the risk free rate minus the Beta multiplied by the benchmark's average return in excess of the risk free rate.

Positive Alphas indicate good performance while negative Alphas indicate weak performance. The period of an Alpha should be for long-term review, 3 years or longer.

The Arms Index is primarily a short-term trading tool, showing whether volume is flowing into advancing or declining stocks. A reading below 1.0 indicates more volume in rising stocks and is positive. A reading above 1.0 reflects more volume in declining issues and is negative. The Arms Index is a contrary indicator that trends in the opposite direction of the market. It can be used for intraday trading by tracking its direction and for spotting signs of short term market extreme.

The Arms Index was developed by Richard Arms in 1967. Over the years the index has been referred to by a number of different names. When Barron's published the first article on the indicator in 1967 they called it the Short-term Trading Index. It has also been known as TRIN (an acronym for TRading INdex).

According to Arms, a 10 day average of the Arms Index above 1.20 is considered oversold, while a 10 day Arms value below .70 is overbought, although those numbers may shift depending on the overall trend of the market.

Information provided by John Murphy, author of Technical Analysis of the Financial Markets and The Visual Investor.

When the Aroon Up line reaches 100 it is a sign of strength. If the Aroon Up persists between 70 and 100, a new uptrend is indicated. Likewise if the Aroon Down line falls to 100, potential weakness is indicated. If the Aroon Down remains persistently between 70 and 100, a new downtrend is indicated. A strong uptrend is indicated when the Aroon Up line persistently remains between 70 and 100 while the Aroon Down line persistently remains between 0 and 30. Likewise a strong downtrend is indicated when the Aroon Down line persistently remains between 70 and 100 while the Aroon Up line persistently remains between 0 and 30.

When the Aroon Down line rises above the Aroon Up line, potential weakness is indicated and expect prices to begin trending lower. When the Aroon Up line crosses the Aroon Down line, potential strength is indicated and prices should begin to trend higher.

When the Aroon Up and Aroon Down Lines move parallel with each other then consolidation is indicated. Expect further consolidation until a directional move is indicated either by an extreme level or a crossover.

Aroon is a Sanskrit word meaning "dawn's early light" or the change from night to day.

The Aroon Oscillator is constructed by subtracting Aroon Down from Aroon Up. Since Aroon Up and Aroon Down oscillate between 0 and +100, the Aroon Oscillator oscillates between -100 and +100 with zero as the center crossover line. The Aroon Oscillator signals an uptrend if it is moving towards its upper limit. It signals a downtrend when it is moving towards the lower limit. The closer the Aroon Oscillator value is to either extreme the stronger the trend.

To calculate up or down directional movement in a trend, a range is determined by comparing today's high and low with yesterdays close. If the largest part of today's range is above yesterday's range, the directional movement is plus. If the largest part of today's range is below yesterday's range, the directional movement is minus. If today's range is within yesterday's range, then directional movement is defined as zero. The average of the directional movement indicators is the ADX.

Read the ADX like an oscillator. A high positive value would be bullish. A low negative value is interpreted as bearish.

This smoothing step results in the ADXR being slightly less responsive than the ADX. Where the ADXR shines is its ability to compensate for the variance of excessive tops and bottoms. It is especially helpful when used in conjunction with trend-following strategies. Strategies that rely on volatility as an indication of movement often fail to take into account movement does not necessarily indicate volatility. ADXR provides information pertaining to the strength of a trend, helping to manage the risk of trading in volatile markets that fluctuate between trending and non-trending. The interpretation of ADXR is the same as that for ADX, the higher the value, the stronger the trend.

High ATR values often occur at market bottoms following a "panic" sell-off. Low Average True Range values are often found during extended sideways movement, like as those found at market tops or after consolidation periods. True Range is used in Welles Wilder's Directional Movement indicator as well as Donald Mart's Master Trading Formula and is a common volatility ratio. The ATR can be used in a channel breakout method of trading by adding or subtracting from the previous bar's close or the current bar's open.

Information provided by Charles LeBeau's Technical Traders Guide to Computer Analysis of the Futures Market.