The A/D Ratio is similar to the Advancing-Declining Issues in
that it displays market breadth. But, where the Advancing-Declining Issues subtracts the
advancing/declining values, the A/D Ratio divides the values. The advantage of the Ratio
is that it remains constant regardless of the number of issues that are traded on the New
York Stock Exchange (which has steadily increased).
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 more likely a correction.
Likewise, low readings imply an oversold market and suggest a technical rally.
Keep in mind, however, that markets that appear to be extremely overbought or oversold
may stay that way for some time. When investing using overbought and oversold indicators,
it is wise to wait for the prices to confirm your belief that a change is due before
placing your trades.
Day-to-day fluctuations of the Advance/Decline Ratio are often eliminated by smoothing
the ratio with a moving average.
