What is the market breadth?
The market breadth is an indicator that helps any trader analyze the number of stocks that are advancing compared to those that are declining in a given index or on a stock exchange. Market breadth attempts to find how much strength and weakness is there in a given stock.
What is a breadth indicator?
They are the mathematical formulas that help measure the number of the advancing and declining stocks and their volume to calculate their participation in the stock index’s price movements.
With this evaluation of how many stocks are increasing and decreasing in price and how much volume of these stocks are trading, the breadth indicators help confirm the stock index price trends. They do not typically provide the trade signals independently but instead give an overall picture of the health on the index chart.
Usually, when a breadth indicator is rising with the increase in the stock index, it shows strong participation in the price rise. This indicated that the price rise is more likely to sustain itself.
Calculating Breadth Indicators
Today in the market, there are several breadth indicators present, each with its formula and calculation method. Some of them are cumulative with every day’s value-added or subtracted from a previous value. Others are non-cumulative, with the period providing its data point.
For a new trader, the most clear breadth indicator is the Decline/Advance Line. It is a cumulative indicator in which the latest advances, i.e., the number of the advancing and the declining stocks, are either added or subtracted from the initial value.
What does a breath indicator indicate?
The breadth indicators provide investors and traders with the view of an overall market. The stock market is usually examined with the help of the stock indexes. For example, the S&P 500 index’s decline/advance line is the cumulative guide for whether the stocks are rising or falling over some time. The calculation shows the investor sentiments in all the supplies present in the index.
The breadth indicators are used for the two purposes:
- Trend Strength:
These indicators help determine the strength of the bearish or the bullish trend.
- Market Sentiment:
The breath indicators help determine whether the market is likely to rise or fall.
There are many different market indicators that the investors and traders use in their analysis in the market.
Some of the popular indicators other than the Decline/Advance indicators include:
- Arms Index (TRIN): It looks at the ratio of the advance to declining volume.
- Chaikin Oscillator: It oscillates based on the price and volume moves.
- On Balance Volume: It focuses on subtracting or adding volume based on whether an index or stock is below or above the prior closing price.
- Up/ Down Volume Ratio: The rising volume is divided by the falling stock volume.
(These are some of the examples, other breath indicators are also present).
Investors and traders usually use different breadth indicators for various purposes.
Breadth Indicators: Gauging the market
Breadth indicators give us information about the market move before it even happens. They help show the divergences when the market is making a new move but usually doesn’t have many stocks participating in the action.
Let’s have a look at the given breadth indicators and, if possible, add them to your daily analysis.
1. McClellan Oscillator
As the name suggests, it acts as an oscillator. It uses the ratio of the stocks advancing minus the declining of stocks and uses two different weighted averages to arrive at a final value. In this, the measurement is usually a bit complicated. This breadth value indicator is excellent for identifying extreme breadth both to the short and the long side.
The McClellan Oscillator looks at a weighted average of Advancers vs. Decliners.
2. Tick Charts
It is seen that when a stock is bought at the offer, the stock ticks on a chart. If that stock is sold at the bid price, then the stock ticks down.
It happens when there is enough demand for more prices, that is any of the ways. It also shows us the number of stocks that are being bought and sold at the bid price. In case there is enough size trading in the market, the Tick hit extremes. They often indicate the exhaustion of a buy program. If the Tick persists for more than 10 minutes, this suggests that the market has a trend day, and it will be riskier than usual days.
3. Advance-Decline Line Indicator
This indicator is much more comprehensive with the number of securities that it tracks. It is almost the same as the Tick Indicator by weighing down the value of the stock market based on the number of securities against declining securities. For example, the indicator posts a 500; it means that 500 more stocks are advancing instead of falling. The opposite of it, a reading a -450, indicates that more stocks are in retreat and are not rising.
Let’s determine if the breadth indicators are a good predictor of the future market movement.
The breadth indicators undoubtedly provide much-needed clarity to the investors and help lead to more savvy and stable investment outcomes. As long as the investors stick to the script and use the breadth indicators to know if the money is going in or out of the market and not on which stocks or the securities are garnering the most money, then the breadth indicators can be handy. It also helps us determine whether most of the cash flows in or out of the market; these indicators can be a reliable, powerful tool to analyze the market movement and momentum, which helps give investors a significant edge over the competition regularly.
Every trader should know that the breadth indicators can only be calculated on indexes and not any particular stock.
It all depends on the data that is available in these indicators. This helps to analyze the market strength of the stock market. The traders need to know that the market breadth is another form of technical analysis tools, such as the chart patterns and technical indicators, which are also used to maximize the odds of success.