The Williams' Accumulation/Distribution Index (AD) study attempts to measure market pressures. It specifically looks for market formula. The study serves to measure market strength and sentiment. You can use the normal technical tools on the study, i.e., trendlines, breakouts, support, and resistance. However, you must watch for instances of substantial divergence from the AD index versus the underlying commodity chart as the key to future price direction.

The FutureSource definition of divergence is as follows: If the market continues to stampede into new high ground, the AD study should follow suit. When the market makes several new highs but the AD fails to make new highs, it is a warning signal of a market about to reverse direction. Conversely, a buy signal occurs when the AD fails to make lower lows while market prices drift to lower levels. In either case, divergence implies a reversal in the dominant trend may be near.

Once you spot divergence, initiate a market position when you spot a clear break in the trendline of the AD index. This minimizes the possibility of taking a position before the actual trend reverses.

Computation

The AD index is computed several different ways. Some computations normalized the index, while others added extra smoothing factors through the use of moving averages. FutureSource uses the following computations to create and chart the AD index. They may differ from other procedures published by the original author. As a starting point, FutureSource sets the initial value of the AD index to zero. From there, FutureSource performs the following comparisons. The comparisons are logically and mutually exclusive. Only one of the three can be valid to correctly measure the market's accumulation or distribution.

The first comparison checks for accumulation, i.e., is current close higher than previous close? If the market is accumulating, then compute the difference between current close and low. Next, add that arithmetic difference to the Accumulation/Distribution Index. Traders perceive an undervalued market and buy. The procedure is:

If Closet > Closet-1 then ADt = ADt-1 + (Closet - Lowt)

The second comparison checks for no change in price. If correct, the AD index does not change. It states:

If Closet = Closet-1 then ADt = ADt-1

The last and final comparison checks for a down market. It checks for current close below previous close. If that is correct, the market is distributing. The software first computes the difference between current high and close. It then subtracts that difference from the AD index. This measures market distribution. Traders perceive an overvalued market and are selling. The final computation is:

If Closet < Closet-1 then ADt = ADt-1 - (Hight - Closet)

• ADt is the accumulation/distribution index for the current period.
• ADt-1 is the accumulation/distribution index for the previous period.
• Closet is the closing price for the current interval.
• Closet-1 is the closing price for the previous interval.
• Hight is the true high price for the current interval.
• Lowt is the true low price for the current interval.

Note: The true high is the higher value of the current high or the previous close. The true low is the lower value of the current low or the previous close.