Market Breadth
Candlefocus EditorMarket breadth indicators, also known as breadth measures, work by tracking the number of securities that are advancing or declining in a particular market. This can give investors insight into how broad-based an index, or the market in general is moving. If a large number of securities are participating in an advance, leading the market higher, then the move is likely to be broad-based and sustained. If a market is advancing on the back of only a few securities, a reversal could be around the corner.
There are a number of different breadth measures which many technical analysts, and investors, use to keep sight of the underlying health of a market or index. These indicators track advancement and decline, stocks, market volume, the number of stocks that move through certain price ranges, and other metrics.
“Advancing issues” is a commonly used breadth measure. This indicator measures how many stocks are either in an uptrend or rising significantly within the day’s trading session. This can be helpful in identifying when the market is broadly rising and when danger is beginning to seep in.
Another important breadth indicator is “Declining issues”. This breadth measure calculates the number of stocks in a downtrend or declining sharply during the trading day. This may be an indication that the trend could be weak and ready to reverse.
Other breadth measures include “Put/Call Ratios” and “Volume Change”. Put/Call Ratios measure the number of put contracts traded relative to call contracts in the option market which can be used to measure the overall sentiment of the market. Engineering used Volume Change to measure the net change of total equity volume from advancing to declining stocks. This can provide information on the strength of a trend, both positive and negative.
While these breadth measures are not able to predict tops and bottoms, they can be helpful in providing context and clues into where the market is headed next. This is especially useful when added to the observation of key price patterns, such as a triangle or a double top.
Ultimately, understanding and keeping sight of market breadth is an important tool for any investors’ trading toolbox. By keeping an eye on breadth indicators, investors can gain additional insight into the strength of the current trend and better prepare themselves for future market movements.