Market breadth indicators analyze the number of stocks advancing relative to those that are declining within a given index or on a stock exchange such as the New York Stock Exchange (NYSE) or Nasdaq. Positive market breadth occurs when more stocks are advancing than declining, suggesting that the bulls are driving the market’s momentum. This movement helps confirm a price rise in the index. Conversely, a disproportionate number of declining securities signals bearish momentum and a downturn in the stock index.
Certain breadth indicators also incorporate volume, examining not only whether a stock is advancing or declining but also the volume of these moves. Price movements on larger volume are considered more significant than those on lower volume.
Key Takeaways
- Market breadth looks at the relative change of advancing to declining securities in a market.
- It is a technical analysis technique that gauges the strength or weakness of moves in a major index.
- More advancing stocks than declining ones suggest bullish market sentiment and confirm a broad market uptrend.
- Conversely, a large number of declining securities confirm bearish momentum and a downside market move.
- Certain breadth indicators also incorporate volume.
Understanding Market Breadth
Market breadth gauges how many stocks are participating in a given move within an index or stock exchange. An index may rise, yet most stocks in the index could be falling, propped up by only a few high-performing stocks. Market breadth indicators help reveal this uneven performance, warning traders that the index’s rise might mask weak overall market activity. Volume is sometimes integrated into these indicators for additional depth.
Market breadth seeks to uncover underlying strength or weakness in a stock index, providing further insights that help technical traders anticipate the index’s next move.
When a large number of stocks advance, it indicates bullish market sentiment and supports a broad market uptrend. Conversely, many declining stocks signal bearish sentiment, aligning with an index downtrend. By measuring market breadth, various indicators look at advancing, declining stocks, or those hitting recent 52-week highs or lows. This data helps forecast continued uptrends or downtrends in an index.
Market Breadth Indicators and Uses
Several market breadth indicators provide varying insights based on different calculations. Here is a sampling:
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Advance-Decline Index: This running total of the difference between advancing and declining stocks, known as the A/D line, highlights divergence between the indicator and a major market index like the S&P 500. For example, if the S&P 500 rises while the A/D line falls, the uptrend may weaken.
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New Highs-Lows Index: This compares stocks making 52-week highs to those making 52-week lows. A reading below 50% suggests more stocks are hitting lows, possibly indicating a bear market. Contrarian investors may buy or sell based on extreme readings.
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S&P 500 200-Day Index: This shows the percentage of S&P 500 stocks trading above their 200-day moving average. A rising percentage above 50% reflects broad market strength. Traders may look for extreme readings for overbought or oversold conditions.
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Cumulative Volume Index: This indicator measures volume by adding or subtracting it based on whether stocks rise or fall, similar to the A/D line.
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On-Balance Volume: This volume-based indicator adds or subtracts volume based on whether the index rises or falls, showing cumulative positive or negative volume.
Example of Market Breadth Analysis in Action
During a rise in the S&P 500, the cumulative volume index confirmed the upward trend by making higher highs alongside the index. However, the on-balance volume indicator remained flat, warning of underlying weakness in the rise, which preceded a steep price decline. Following the decline, both market breadth indicators rebounded with the S&P 500 ETF.
What Is Meant by Market Breadth?
Market breadth examines the breadth of the market by determining the strength of moves within an index. This is done generally by comparing the number of rising stocks to those that are declining.
What Is Market Breadth and Depth?
Market breadth assesses the strength or weakness of moves in a major index, whereas market depth pertains to how a market can handle large orders without significantly impacting the security’s price.
Is Market Breadth a Good Indicator?
Market breadth indicators derive their insights from price and volume, gauging market sentiment. However, it’s crucial to confirm this information with actual price movements. Basing trading decisions solely on indicators is not advisable; always verify with price action.
The Bottom Line
Market breadth assesses the health of a market by analyzing price movements within an index. It helps determine if rising or falling market momentum is supported by an increasing or decreasing number of individual stocks. By understanding market breadth, traders can better interpret overall market strength and take more informed investment decisions.
Correction—April 3, 2024: This article has been updated to clarify the definition and interpretation of on-balance volume indicators.
Related Terms: Stock Index, Bull Market, Bear Market, Volume, Market Sentiment, Technical Traders
