An anemic appearance in advance-decline figures can adversely affect the opinions of all but the most optimistic of analysts. While many experts would suggest the market can climb higher regardless of the quality of breadth, it is important to understand when historically important gauges are confirming a subtle change in direction or signaling a major reversal. The advance-decline numbers have long been used to help distinguish market tops early in their development and give advance warning to upcoming bearish cycles.

There are several ways to use a statistical summary of advances and declines. Weekly figures offer a perspective for long-term investment analysis while daily numbers can be charted to indicate reversals of a short-term nature, suitable for trend-trading or scalping. The methods of A/D interpretation are basic to technical analysis and the results are accurate and easy to understand. One of the most common evaluations is based on the divergence of the A/D line and popular market indices. Another successful indication involves the use of long-term moving averages of the daily numbers.

A well-known axiom suggests that a trend in motion can be expected to continue until it reverses. Using a long-term moving average of the A/D statistics can help identify this trend and recognize the true momentum of the market. Interpreting this type of indicator is similar to other momentum-based techniques in that the primary signal is a crossing (in either direction) of the median line. A move from one area to the other confirms a trend in that direction and the longer the period that the gauge has been either above or below the median, the more meaningful the signal when it occurs. The most significant trends are those indicated when a move has come from deep in positive or negative territory. In a bullish market, this indicator will usually achieve new highs before any of the major indices and a preemptory sell signal is identified by a sharp drop from the peak reading while it's still in positive territory. The most significant exit signals occur when the gauge has been in the upper region for extended periods and reached the highest extreme before finally issuing a bearish signal.

This unique indicator can help identify the beginning of a bearish market well before the future trend surfaces and when utilized on a regular basis, it can provide added insight into the strength and character of the current cycle. The ability to recognize fundamental changes in the market outlook is a requirement for successful investing. To profit on a consistent basis, one must become familiar with the most common methods of technical analysis and apply this knowledge as a practical part of his or her daily trading strategy.