Market Breadth

What Is Market Breadth?

Market breadth indicators analyze the number of stocks advancing relative to those that are declining in a given index or on a stock exchange, for example, the New York Stock Exchange (NYSE) or Nasdaq. Positive market breadth happens when a larger number of stocks are advancing than are declining. This recommends that the bulls are in control of the market's momentum and affirms a price rise in the index. Conversely, a disproportional number of declining securities is used to confirm bearish momentum and a downside move in the stock index.

Certain breadth indicators also incorporate volume. They won't only glance at whether a stock is advancing or declining in price, yet in addition at the volume of those moves. This is because price continues on larger volume are considered to be more significant than price continues on lower volume.

Understanding Market Breadth

Market breadth alludes to the number of stocks that are participating in a given move in an index or on a stock exchange. An index may be rising yet the greater part the stocks in the index are falling because a small number of stocks have such large gains that they drag the whole index higher.

Market breadth indicators can reveal this and warn traders that most stocks are not actually performing great, even however the rising index makes it seem as though most stocks are doing great — an index is an average of the stocks in it. Volume may also be added into these indicator calculations to provide additional knowledge into how stocks inside an index are acting overall.

Market breadth attempts to find how much underlying strength or weakness there is in a given stock index. By assessing the strength or weakness, which isn't plainly noticeable by taking a gander at a chart of the index, technical traders gain understanding into what the index may do next.

A large number of advancing stocks is an indication of bullish market sentiment and is used to confirm a broad market uptrend. A large number of declining stocks shows sentiment is bearish, which would align with an index downtrend. While measuring market breadth, many indicators take a gander at the number of advancing and declining stocks, or the number of stocks that have created a recent 52-week high or low. This data can provide information about whether an index uptrend or downtrend is probably going to continue.

Traders use market breadth indicators to assess the overall health of a market/index. Market breadth indicators can in some cases provide early warning indications of a drop in the index, or forecast an approaching rise in the index.

Market Breadth Indicators and Uses

There are a number of market breadth indicators. Each is calculated differently and thusly may provide marginally different information. A few indicators take a gander at the number of advancing or declining stocks, others compare stock prices to another benchmark, and a couple of incorporate volume.

The tactic for most market breadth indicators is to monitor for confirmation and divergence. Confirmation is the point at which the indicator is moving favorably and the index is rising. Divergence is the point at which the index and indicator move in inverse directions. This warns that the index may see a reversal soon.

Market breadth indicators are poor timing signals. They may provide signals way too early or may not forecast an index reversal that does happen.

Here is a sampling of the market breadth indicators available.

Advance-Decline Index: This indicator, also known as the A/D line, calculates a running total of the difference between the number of advancing and declining stocks. Traders typically search for divergence between the indicator and a major market index, like the Standard and Poor's 500 index (S&P 500). For example, in the event that the S&P 500 is rising and the A/D index is falling, it indicates the current uptrend in the index may be losing its momentum. On the other hand, in the event that the S&P 500 is falling and the A/D index is rising, it recommends that the move lower in the index may be about to reverse.
New Highs-Lows Index: The new highs-lows indicator compares stocks making 52-week highs to stocks making 52-week lows. A reading below half indicates that more stocks are reaching their lows compared to stocks that are reaching their highs and could signal a move into a bear market. Contrarian investors may utilize this market breadth indicator to buy or sell stocks when it gives extreme readings, for example, below 30% or above 70%.
S&P 500 200-Day Index: Traders can utilize this index to see what percentage of stocks in the S&P 500 are trading above their 200-day moving average. A rising indicator above half indicates broad market strength. Similar to the new highs-lows index, traders frequently search for extreme readings to find overbought and oversold conditions in the broader market. Short-term traders who want a more sensitive moving average to provide earlier signals can utilize a 50-day index that shows what percentage of stocks are trading above their 50-day moving average.
Cumulative Volume Index: This indicator measures volume. Stocks that rise have their volume added to the positive volume. Stocks that declined have negative volume. The indicator keeps a running total of whether the overall volume is positive or negative, and by how much, and is used in a similar fashion to the A/D line.
On-Balance Volume: This indicator also sees volume, besides up or down volume is based on whether the index rises or falls. In the event that the index falls, the total volume is counted as negative. Assuming the index rises, the total volume is negative. Each day is added or subtracted from prior readings to give a running total. It is used in a similar way to the A/D line.

Example of Market Breadth Analysis in real life

The following chart shows the SPDR S&P 500 (SPY) ETF along with the on-balance volume indicator and the cumulative volume index (for all US stocks).

During the rise in the S&P 500 on the left, the cumulative volume index confirmed the rise, as the indicator continued to make higher highs along with the S&P 500. On-balance volume told a different story, as the indicator was for the most part flat, giving a warning sign that there was some underlying weakness in the rise. This was followed by a precarious price decline.

At the point when the S&P 500 ETF rebounded, so did the market breadth indicators.

Highlights

Indicators may take a gander at advance and declining stocks, volume, the number of stocks reaching certain hurdles, and different metrics.
Market breadth takes a gander at the relative change of advancing to declining securities in a market.
Market breadth indicators may forewarn of reversals and uncover strength or weakness in the developments of an index that are not noticeable essentially by checking out at a chart of the index. This happens when the indicator diverges from the index.