AD Volume Index (ADVI)

AD Volume Index stands for Advance Decline Volume Index, it is almost as same as Advance Decline Percent Breadth Index but with some changes on top of it.

Whereas in the Advance Decline Percent Breadth Index, volume is not considered, here volume is considered. Advance Decline Percent Breadth is expressed as Percentage, where AD volume Index is not expressed as Percent. The Advance-Decline Volume Index (ADVI). The ADVI provides a unique perspective on market breadth and can offer valuable insights into the overall health of the market.

The Advance-Decline Volume Index is a technical indicator that combines both price movements and volume data to measure market breadth. It is derived from the daily difference between advancing and declining stocks, multiplied by their respective volume. The index reflects the net volume flow in the market, highlighting whether buying or selling pressure is dominant.

Let’s see an example, for example on a given day in Nifty50, only two stocks (A, B) advanced and only one stock declined (C) and 47 remained unchanged, I’m keeping this small number for the ease of understanding and simplicity.

So, the next step is to find the Advance and Decline volume, to do that we need to multiply their respective volume with price.

Stock A is a stock which is Advanced, meaning it closed higher than yesterday, so whatever is the volume of that stock on that day, the entire volume is multiplied with the price and expressed a positive value. So, if the volume of Stock A is 10,000 and the close price is Rs.10 then the value is (10,000 x 10 = 1,00,000). 1,00,000 is the value for Stock A, and for stock B also do the same step and find the value, let’s say the value for Stock B is 2,00,000. Now the cumulative volume of Stock A and Stock B is 3,00,000. Why cumulative volume of Stock A and B because both stocks advanced from yesterday.

Likewise, we need to find the value of the declined stock, here in our example we have only one stock C is declined and if the value of that is 1,50,000, here the value is expressed as a negative number because the stock is from the decline set, so it is -1,50,000.

Now, we need to find the net volume which is we need to find the difference between the sum of all advance volume and sum of all decline volume, here in our example the sum of all Advance volume is 3,00,000 and the sum of all decline volume is -1,50,000, so our net volume is 1,50,000.

The net volume of 1,50,000 is expressed as this same absolute value in the in the AD volume index for the respective day. Here in this indicator, there is no smoothing or averages.

The ADVI is primarily used to assess the strength of market moves and determine the level of participation among market participants. By analyzing the ADVI, traders can gain insights into the overall trend and potential reversals.

In an uptrend, a rising ADVI indicates strong buying pressure and broad market participation, confirming the bullish sentiment. Conversely, in a downtrend, a falling ADVI suggests increasing selling pressure and a lack of market breadth, affirming the bearish sentiment. By corroborating price trends with volume data, the ADVI helps traders validate the strength of market movements.

Divergences between the ADVI and price movements can signal a potential reversal in the market. For instance, if prices are making higher highs, but the ADVI is making lower highs, it suggests that fewer stocks are participating in the upward move, potentially indicating a weakening trend. These divergences can serve as early warning signs for traders to adjust their positions or look for potential reversals.

At market extremes, such as major tops or bottoms, the ADVI can provide valuable insights. In a bull market top, the ADVI may start to decline, indicating a decrease in market breadth and potential distribution. Conversely, in a bear market bottom, the ADVI may start to rise, signaling an increase in buying interest and potential accumulation.

Let’s see an example of ADVI.

The above is a candlestick chart of Nifty50 from the period of 1^st Jan 2022 to 13^th June 2023, below which is the ADVI in green line and a horizontal dotted red line separating the positive and negative values.

ADVI scale is expressed as an absolute value meaning that it is not expressed as a relative value like ratio or as a percentage against anything.

From the above chart, you can observe that the ADVI is trying to hold above in the positive zone, and the price is rallying upwards, and when is price is in the downtrend, the ADVI doesn’t hold that much below the zero line, it frequently visits the positive zone in between, that’s because of the market trying to take the advantage of the cheaper price and there is no vibrant selling pressure.