The market is a tug of war between buyers and sellers. It’s one of the stock market basics. As a result, the market can get choppy. Hence using techniques like market breadth to help you find a direction.
A positive market breadth means more stocks are rising as opposed to declining. As a result, the market has a bullish bias. The opposite is also true. If more stocks are falling than rising, market breadth and depth would tell you that a bearish bias is in place. In fact, this strategy differs from technical analysis because it looks to have all indicators moving in the same direction.
There are two kinds of trader; technical and fundamental traders. Technical traders use indicators to help them trade. Whereas fundamental traders use research to help them trade.
Traders use market breadth to try and gain an advantage in trading. However, because of the amount of indicators available, sometimes learning 2 or 3 is best. You can open a practice account with Thinkorswim by TD Ameritrade to begin practicing. Take our Thinkorswim tutorial to learn how to set up your practice account.
Many indicators end up overlapping so you really only need to master a couple. Basically market breadth indicators look to see how many companies overall are advancing as opposed to declining.
If you use technical analysis to trade, then you know that there are times when some indicators are bearish while some are bullish. That can depend on your style of trading as well.
Stocks make moves intraday all the time. As a result, your indicators may be telling you what’s happening or has happened. There are a lot of different types of stocks.
Internal indicators are used to help define market breadth. In essence, internal indicators look at the level of force measured with the participation of market makers.
Hence the importance of knowing how to read technical indicators and patterns for yourself as opposed to following Level 2 which shows market maker moves.
Volume, advance/decline and new highs/lows are the indicators that make up the internal indicators. Volume is extremely important to trading. Trading stocks with little to no volume is hard to do. You end up waiting forever for a move.
Advance/decline data takes a look at what companies are doing. In other words, are they moving up or down? The more companies that move in the same direction, the more effect it has on how the market moves.
New highs/lows look at the general outlook of companies. How are investors or traders feeling about these companies? The more positive the feeling the higher the stock moves. The more negative the feeling the lower the stock moves.
The Point and Figure Chart
Point and figure charting doesn’t seem to be very popular among traders. However, pairing the point and figure chart with market breadth helps to find the general direction.
Point and figure charting removes time from the equation. It’s typically more useful in long term investing because time isn’t really a factor. You’re ok holding throughout all the price movement in the market.
All the noise is removed by just looking at the large price swings. Market breadth is looking at the overall market as a whole. Which makes sense as to why you’d look at the big moves.
Point and figure charts monitor supply and demand which plays into market breadth. Too much supply with no demand means nothing moves. Whereas a lot of demand and not enough supply means volatility and volatility is key.
Using point and figure charts filter out the noise for market breadth. You only see the closing price and not all the little moves throughout the day. As a result, day traders don’t use point and figure charts to trade.
The Trend Is Your Friend
Market breadth is all about finding and confirming a strong trend. The trend is truly your friend. If you’ve ever tried to trade without a trend in place, you know how difficult it is.
Market breadth is there to confirm that the market is in a strong trend, whether up or down. That’s why a change in one of the internal indicators is pretty significant.
Those indicators move in the direction of the trend. So when one of them moves in a different direction, pay attention because it’s an important warning signal. Any reversal that happens when indicators are in overbought or oversold territory can be a sign that price is gonna reverse fast.