The NASDAQ Stock Market is the second largest U.S. exchange by market capitalization -- after the New York Stock Exchange. NASDAQ is considered to be the home for smaller up-and-coming growth companies, as well as some of the tech giants such as Apple and Microsoft. Some traders and investors keep track of advancing and declining issues as a technical indicator for overall NASDAQ market direction.
Advancing NASDAQ stocks are the number of stocks listed on the NASDAQ exchange that are trading higher on the day compared with the previous day's closing price. Declining stocks are those that are trading lower on the day. Financial news outlets provide the advance and decline numbers throughout the stock market business day. For example, at the time this article was written, the NASDAQ had 956 advancing issues, 1,684 declining issues and 69 unchanged for a total of 2,709 stocks.
Breadth of Advance
The number of advancing stocks on the NASDAQ provides an indication of the strength or breadth of an overall market increase. For example, on the day of the advance/decline numbers listed above, the Dow Jones Industrial Average was up for the day, but the NASDAQ Composite index declined by approximately 1 percent. With only 35 percent of the NASDAQ stocks advancing, it was difficult for the NASDAQ index to post a positive return.
Advance Decline Line
A longer-term technical indicator for the NASDAQ is the advance decline line. Points on the line are calculated each day, adding the net number of advances to the previous day's total. For the daily example used here, there were 728 more decliners than advancers, so the 728 would be subtracted from the running total of the advance decline line and plotted for the day's result. The advance decline line will usually parallel the stock market -- up or down.
Trading the ADL
Traders use the NASDAQ advance decline line in several ways. The steepness of the line compared to the slope of the NASDAQ index chart shows how many of the stocks in the NASDAQ are running with the trend. If the advance line is not as steep as the stock index line, the bull market may not have a lot of support. If the advance decline line turns downward while the stock market index continues to climb, it is indicative of a pending market top and reversal.
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