BSE NSE Advances and Declines Stocks, Stock Market Price Analysis
The advance decline ratio is a very simple approach to stock market price analysis.
If you look at NSE advances and declines stocks or the BSE advances and declines
stocks; you will find that there are some distinct patterns emerging. A/D ratio
is quite commonly used and if you open the daily newspaper or the website of NSE
or BSE you can get the A/D data. What does the A/D data essential measure? Simply
put, it measures the ratio of number of stocks that advanced over the previous day
to the number of stocks that declined over the previous day. If the A/D ratio is
2 then it means that for every 1 stock that declined, 2 stocks advanced. On the
other hand if A/D is 0.5 it means that for every 1 stock that advanced, 2 stocks
How to interpret the A/D ratio?
The advance / declines ratio by itself gives you a rough picture of the sentiments
underlying the market. For example, if the A/D ratio is above 2, then it is normally
an indication that the undertone of the market is bullish. On the other hand if
the A/D ratio is below 0.5 then it an indication that the undertone of the market
is bearish. But the real benefit of the A/D ratio can be derived if the data is
put in perspective. Essentially, you need a sectoral perspective and a time series
perspective. That is how LKP Research looks at NSE Advances and declines stocks
when it does its stock market price analysis.
A/D ratio: How LKP research provides a sectoral perspective…
The default analytical screen on LKP is the sectoral A/D ratio. This is useful to
get a quick and rapid view on how the underlying price trend is evolving in the
various sector groups. For example, if banks and energy have a strong A/D ratio
then it can be indicative of rising interest in these stocks. Similarly, if the
A/D ratio of technology and pharma is below 1 then it is clear that the momentum
of the market is against these sectors. Of course, you can click on these sectors
and drill down to the specific components of this index for granular details.
A/D ratio: Why to use the time series analysis for more reliable results…
Remember that A/D ratio at a point of time does not give too many insights. What
could be more relevant is to look at how the trend of A/D ratio evolves over a period
of time. That would be a clearer indication of whether the positive or negative
trend is getting reinforced or weakened. The more important thing to remember is
that A/D ratio is not a measure by itself. Like any analytical tool, the A/D ratio
is only to give you triggers for drilling deeper into a particular sector or stock.
That is the big utility of advances / declines of stocks.