This indicator is based on Net advances, which is derived from subtracting Number of Advancing Stocks and Number of declining stocks. The Advance-Decline line is a cumulative line of these Net Advances. When Index increase with increase in AD line, it indicates strength in index / market. Similarly when Index decreases with decrease in AD line, it indicates weakness in index / market.
Divergences are another way of interpreting this indicator. Increase in Index and fall in AD line shows negative divergence and similarly decrease in index and increasing AD line shows positive divergence. These divergences can signal a reversal in market trend.
Net Advances = Number of Advancing Stocks - Number of declining stocks
AD Line = Previous AD Line Value + Net Advances