Technical analysts use several indicators to forecast how stock prices may move in the future. Mastering these indicators and reading them correctly can increase returns. Many technical analysts add market breadth indicators to their toolbox because they monitor the stock market’s current momentum.
What Is Market Breadth?
Market breadth informs traders about how many stocks are increasing and decreasing in price within an index. Some traders use this number to assess the market’s trend and trade stocks based on this indicator. You can filter market breadth based on an index, exchange-traded fund (ETF), sector or another category.
What Do Indicators for Market Breadth Do?
Market breadth indicators can help traders predict how the stock market and individual equities will move in the upcoming days, weeks and months. No technical indicator has a 100% success rate, but technical analysis can increase the likelihood of making profitable trades.
How Does This Measurement Work?
Market breadth gives traders a glimpse into how groups of stocks are moving. Market breadth indicators use a version of the advance/decline Ratio (A/D Ratio) to help traders determine the current trend. The A/D ratio is the number of advancing stocks divided by the number of declining stocks. If 10 stocks increase and five stocks decrease, the market breadth is 2 (10 divided by 5 is 2). Instead of meticulously reviewing hundreds of stocks, market breadth lets traders see whether more stocks are rising or falling within a designated time frame.
How Can These Alerts Help Traders?
Market breadth can help traders determine whether stocks are oversold or undersold. An oversold market presents an opportunity to exit positions, while undersold markets present buying opportunities. Ranges between oversold and undersold can also lead to better decisions if you review historical trends and other indicators. Traders should look at multiple indicators before making trades, but market breadth indicators can help.
10 Quality Indicators Displaying the Breadth of the Market
Traders can select from several market breadth indicators. Here are some of the most frequently used indicators to consider when adjusting a stock portfolio.
1. Advance-Decline Line
The advance-decline line measures the number of advancing stocks against the number of declining stocks. This line uses the A/D ratio to gauge market trends and can help with evaluating stocks. An A/D ratio above 1 indicates bullish momentum, while an A/D ratio below 1 indicates bearish momentum. A ratio that is too high or too low can indicate an overbought or oversold market, respectively.
2. Advance-Decline Percent
The advance-decline percent follows a similar approach to the advance-decline line. Instead of advances over declines, the A/D percent uses a different formula:
(Stock Advances - Stock Declines) / Total Stocks
A positive market breadth can indicate bullishness, while a negative market breadth reveals potential bearish momentum.
3. McClellan Oscillator
The McClellan Oscillator uses the difference between rising and falling stocks to help traders assess the current trend. This indicator considers every stock in the exchange instead of a smaller subset. A McClellan Oscillator above zero can indicate bullishness, while any number below zero can indicate a bearish trend. Changes in the oscillator can precede changes in the index. Traders who see a rising index and a falling oscillator may believe the index is due for a decline.
4. McClellan Summation Index
The McClellan Summation Index measures stock advances and declines using the McClellan Oscillator methodology. However, the index is a long-term technical indicator that can help investors and traders. It measures the cumulative change of the McClellan Oscillator.
5. New Highs-Lows Index
This index measures the percentage of stocks reaching 52-week highs and lows. If more than half of stocks have recently passed their 52-week highs, it can indicate bullishness. But some traders believe the trend will change to bearishness if this index exceeds 70%. Similarly, a reversal can be due if fewer than 30% of stocks have reached their 52-week highs and 70% of stocks have recently hit 52-week lows.
6. S&P 500 200-Day Index
The 200-day moving average is a useful technical indicator, but it can take a while to look at the 200-day moving average of each stock in an index. This market breadth indicator simplifies the work and reveals how many stocks in the index are trading above their respective 200-day moving averages.
7. Cumulative Volume Index
This index measures the cumulative volume of advancing and declining stocks. Stocks on the upswing have volume added to this index, while stocks experiencing setbacks have declining volume.
8. On-Balance Volume
On-balance volume measures changes to the index’s volume. While the cumulative volume index looks at each individual stock, the on-balance volume focuses on an index’s performance.
9. Net New High and Net New Lows
Traders arrive at this technical indicator by calculating the difference between new net highs and new net lows. If 50 stocks experience a new high and 30 stocks experience new lows, the net new high is 20 stocks (i.e., 50 - 30 = 20). If 70 stocks experienced new lows instead of 30 stocks, it would generate a net new low of 20 stocks (i.e., 70 - 50 = 20). New net highs can be bullish, while new net lows can indicate bearishness.
10. Periodic High and Low
The periodic high and low indicator compares stocks hitting their highs with stocks hitting their lows during a specified period. Traders interpret more stocks within the group reaching highs than lows as a bullish trend. However, an overly bullish market can be due for a correction.
Predicting Market Movements
Market breadths can help traders more accurately predict how stocks will move in the future. These indicators look at current trends and have historical data to back them up. Technical analysts have used market breadths and other technical indicators to predict stock price movements for over a century. Mastering these indicators and crafting your own strategy may yield higher profits.
Frequently Asked Questions
What is an example of market breadth?
The Advance/Decline line is one of the most common examples.
How do you measure market breadth?
Many stock analysis tools provide these answers for you and conduct many calculations in a few clicks.
How are market breadth indicators used by investors?
Investors look at these indicators to gauge the current trend and try to detect reversals before they happen.
All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
About Marc Guberti
Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.