Market breadth indicators are an excellent metric to use to gauge the relative stock performance between stocks that are advancing and stocks that are declining. These indicators are essential for people tackling the stock market, and they can also help offer valuable insights into potential stock market movements, allowing you as a trader to remain one step ahead of your competition.
Types Of Market Breadth Indexes
Positive market breadth is when more stocks are advancing than the ones that are declining. This means that the bulls are in control of the market momentum. Of course, this also helps confirm a price rise in the index.
Market breadth indicators give traders a more holistic view and understanding of market behavior. For example, if more securities are declining rather than advancing, this shows a bearish momentum. These numbers can help uncover hidden strengths and weaknesses in the movement of a specific index.
Let’s read on for different types of market breadth indicators.
What’s The Benefit?
Different kinds of market breadth indicators carry distinct advantages; market breadth indicators take advantage of an expansive market view. This view can help alert traders to market inconsistencies; suppose the price of an index is rising, but more than half of the stocks are falling in value. So while the rising index might indicate that most stocks are doing well, the actual case might be different.
Volume can also be added into these indicator calculations to provide additional insight into how stocks within the index are acting overall. While this indicator is not foolproof but these numbers are crucial for a successful trading business.
Market Breadth Indicators: Advance Decline Index
This index is market breadth indicators representing the difference between the number of advancing and declining stocks within a given index.
A rising A/D index value suggests that the market is gaining momentum, whereas a falling value means that the market is losing momentum.
Traders often look for divergence between the AD line and also a significant market index. So if the AD line is rising, but the NASDAQ is declining, that can mean that a market reversal is coming soon.
When the A/D index is rising while the stock index is falling, this is called bullish divergence, and it could be a sign that the stock index will start to lead higher soon.
On the other hand, the A/D index also tends to fall when the stock index is falling.
This makes sense since a stock index will decline more when stocks are falling than rising.
S&P 500 200 Day Index
This index analyzes the number of S&P 500 stocks that are traded over their 200-day moving average. Although a rising indicator above 50% indicates a broad market strength, traders often use this index to help find overbought and oversold conditions in the broader market.
Short-term traders prefer using the S&P 50 day index instead. You look at multiple factors in a bull market, such as how oversold raw data and equities are. Hence why it’s a part of the market breadth indicators.
The Tick index looks at the number of stocks that are rising versus the number of stocks that are falling. The indicator analyzes the breadth and scope of the market, and it is popularly used by day traders trying to view the market sentiment at a given point in time.
This index helps day traders in making quick trading decisions that are dependent on the market. However, this indicator is a heavily speculative identifier of market sentiment at a specific point in time. Therefore, some traders couple the tick index with the moving average to get a more accurate market picture.
In the case where a stock price is making lower lows, but the tick index is making higher lows, sellers may be losing momentum. If the stock price is reaching new highs while the tick index is not registering these new highs, there are possible weaknesses in the prevailing market trends. This is why you can include this in the market breadth indicators.
New Highs-Lows Index
This indicator compares stocks that have been making highs for 52 weeks to stocks that have been making lows for 52 weeks. This indicator is used in technical analysis, analysis of charts, and past stock data as an indicator to determine the direction of the market or the index.
Highs and lows are the bread and butter of trading. This index is calculated by taking the simple moving average of the new 52 week highs and new 52 week lows of an underlying index.
If the high low index is above 50, it will imply that there are more 52-week highs than there are 52-week lows.
For the market to be bullish, the index needs to be at 70% consistently. For a bearish market, the level needs to be around 30%.
We have to be able to trade when the market moves up, down, or even sideways. And if you trade options, you can trade a sideways market.
Cumulative Volume Index
Like the name, this indicator follows volume. Stocks that rise has their volume added to the positive volume. Stocks that decline have negative volume. The indicator works in such a way that it computes the difference between the advancing stocks and the declining stocks and uses them as a running total.
For the CVI, it is essential to look at the trend over time and not just the number. Investors need to analyze the trend relative to the index price to interpret the meaning. If the CVI is trending, higher traders can assume that a trend is gaining momentum and might be a good opportunity to trade alongside the road. Traders will also look for divergences and convergences between the price and the CVI trend lines.
If a CVI is trading lower, traders might assume that a trend is losing momentum and that a reversal could be right around the corner.
Market Breadth Indicators: On-Balance Volume
This indicator makes use of volume flows to help predict changes in market prices. The underlying theory behind this indicator is that crowd sentiment can predict a bullish or bearish outcome.
The on-balance volume indicator provides a running total of an asset’s total trading volume and uses it to indicate whether the volume flows in or out of a given security or currency pair.
Traders analytically use this indicator by looking at the nature of OBV movements over time.
This indicator distinguishes institutional investors and also less sophisticated retail investors. If used correctly, this indicator can highlight good buying opportunities against incorrect market trends.
Remember that market breadth indicators are a help, not something that’s 100% reliable. That’s not to say not to use it. But remember that there’s no sure thing in trading.
Therefore, make sure you get confirmation on any trades you’re going to place.
Market Breadth Indicators Bottom Line
Market breadth indicators are a help in knowing where stocks are potentially headed. As with anything trading-related, news moves markets. So while an indicator may look one way, make sure to check the news for confirmation.