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An Analysis of the Advance-Decline Line as a Stock Market Indicator

Published online by Cambridge University Press:  19 October 2009

Alan J. Zakon  and
James C. Pennypacker
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Extract

Perhaps one of the most time-honored of technical market indicators is the Advance-Decline Line. Its predictive powers as a leading indicator of the general market have been written about, and historical data on this index are published in Barron's. However, the validity of this series as a leading indicator has not been subjected to rigorous statistical analysis.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 3 , Issue 3 , September 1968 , pp. 299 - 314
Copyright
Copyright © School of Business Administration, University of Washington 1968

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References

1 “Advance-Decline Line: A Clue to the Underlying Strength or Weakness of the Market,” Freeman, George K., Barron's national Business and Financial Weekly, January 21, 1963Google Scholar.

2 Granville, Joseph, Strategy of Daily Stock Market Timing (Englewood Cliffs, N. J.: Prentice-Hall, 1961)Google Scholar.

3 The 15-period time duration is sufficiently long to indicate the lack of predictive power on the part of the Advance-Decline Line. Subsequent exhibits suggest that a 15-period sample includes most of the variance around what is essentially a coincident indicator. The actual time periods used (4 years from April 11, 1963 to October 26, 1967, and 1 year from September 6, 1966 to October 29, 1967) were chosen on the basis of recency. The four-year period was used for weekly data, and the one-year period for daily data. It was felt that the time periods included enough data points to be of meaning to the investor, and that longer periods would add very little. On this basis, while the periods were arbitrarily drawn, the method of selection should introduce no bias to the study.