Breadth indicators help in understanding the internal strength of the market. Sometimes you will not be able to understand the direction of the market trend just by looking at the market prices.
Breadth indicators help us understand how the “market of a stock” is doing rather than just understanding the stock market.
Often breadth indicators indicate a market move before a divergence is through, where markets are taking a new move but many stocks are not participating in that move.
In this blog, we will discuss the basics of breadth indicators and the 15 most commonly used breadth indicators that traders should know when analyzing trend movements in the market.
What are width indicators?
Breadth indicators help traders and investors to understand the overall outlook of the market. The movement in the stock market is checked using the stock index.
For example, Nifty 50 advance/decline line is a cumulative guide that helps us understand whether more stocks are rising or falling over time.
This calculation helps us to analyze the overall investor sentiment across all the stocks in the index.
Width indicators are mainly used for two purposes:
- market sentiment: These indicators can help us determine if a market trend is about to reverse.
- Tendency Strength: width indicator a . can also help us determine the strength of bullish or bearish trend.
15 breadth indicators that the trader should know:
Below is a list of 15 breadth indicators that a trader should know to understand the stock market sentiment:
1. Width Line:
The breadth line also known as the advance/decline line is one of the best ways to measure the internal strength of the market.
This line is the cumulative sum of advances minus deductibles. The formula for the same is shown below:
Width Line Value = (Number of Advance Stocks – Number of Down Stocks) + Width Line Value of the previous day.
When the number of forward shares exceeds the number of down shares, the width line will increase and vice versa.
When the average of the stock market is rising but the breadth line is not increasing negative deviation This means that only a few stocks are participating in the move and traders should be cautious while trading the index.
2. McClellan Oscillator:
The McClellan oscillator is the difference between an advance and a decline of two exponential moving averages. The two averages are the 19 day EMA and the 30 day EMA.
The positive and negative values of this indicator indicate that more stocks are moving up or down. The indicator is positive when the 19-day EMA is above the 39-day EMA, and when the 19-day EMA is below the 39-day EMA.
This indicator usually oscillates between the range of +100/+150 or -100/-150.
This oscillator can also be used to find negative and positive divergence.
3. McClellan Ratio-Adjusted Oscillator:
As McClellan discovered that only advances and downsides could be affected by the total number of issues traded, he developed the McClellan Ratio-Adjusted Oscillator.
The McClellan ratio-adjusted oscillator is the ratio of the net debt decline of advances divided by the total number of issues traded.
The ratio is multiplied by 100 to make it easier to read.
4. McClellan Sum Index:
This sum index is an area under the McClellan ratio-adjusted oscillator.
There are many interpretations of McClellan’s sum and it is considered neutral at a reading of +1,000. During the 1960s, the McClellan Sum Index generally remained within the range of 0 and +2,000.
The interpretation of this indicator is almost identical to that of the McClellan ratio-adjusted oscillator.
5. Width Thrust:
Thrust occurs when a deviation from the norm is sufficiently large to be identified and when that deviation signals either the end of an old trend or the beginning of a new trend.
One of the indicators for analyzing breadth thrust was developed by Mark Zweig which calculates a 10-day simple moving average of advances divided by the sum of advances and declines.
6. Advance- Decline Ratio:
The advance-decline ratio means that the number of forward shares divided by the number of declining shares.
The advance-decline ratio can be used for a variety of time frames, such as a day, a week, or a month.
On a standalone basis, this indicator indicates whether the market is overbought or oversold.
7. ARMS Index:
The ARMS Index also known as TRIN and MKDS is one of the popular up and low volume indicators.
Up volume is the volume traded in all the forward stocks and the down volume is the volume traded in all the down stocks which is another way of assessing the strength of the market.
When there is a lot of down volume the market is at or near the bottom and when there is a lot of up volume the market is at or near the top.
This indicator is calculated as advance/decline divided by up/down volume and inversely correlated with market prices.
8. Net New High and Net New Low:
The Net New 52-Week High is a simple width indicator calculated by subtracting the new low from the new high.
“New lows” are the number of stocks making new 52-week lows and “new highs” are the number of stocks making new 52-week highs.
This indicator helps to find out the internal strength or weakness in the market.
This indicates that there will be more new highs when the indicator is positive. On the other hand, there are more new lows when the indicator turns negative.
9. New high vs new low:
This is the simplest indicator that suggests buying when the number of new highs exceeds the number of new lows on a daily basis.
On the other hand, one should sell when the number of new lows exceeds the number of new highs on a daily basis.
Read our latest article on 20 Technical Indicators You Can Trust When Trading Stocks in 2021
10. Multiplicity Index:
The multiplicity index is calculated as the sum of the 25 days of the absolute difference between the advance and the decline and is always a positive number.
A high number in a plurality index indicates an adjacent bottom and a high number in a low plurality index indicates an imminent vertex.
1 1. 90% negative days:
This indicator is a reliable measure to identify stock market bottoms using daily up and down volume and daily gain and lose points.
A 90% downside day is when the percentage of downside volume exceeds 90% of the total upside and downside volume on a particular day and the percentage of downside points increases to 90% of the total points gained and points lost.
12. Absolute Width Index:
It is a breadth indicator which is calculated by taking the absolute difference between advancing and declining stocks.
Typically, volatility is rising in large numbers, indicating a significant change in stock prices in the coming weeks.
13. High-Low Logic Index:
The high-low index compares stocks that are hitting their 52-week highs to those hitting their 52-week lows.
High-Low indices are mainly used by investors and traders to confirm the prevailing market trend of broad market indices.
14. Ticks Index:
This index is calculated by taking all the stocks in the market in which all the stocks with a down tick have gained momentum and then the result is displayed on the chart based on a specific time frame.
It is an intraday indicator as it is using data on tick basis but useful for spotting inefficiencies in the market.
One should note that breadth indicators can only be calculated on the index and not on a particular stock.
Based on the available data these indicators can be calculated to analyze the market strength of the stock market.
Traders should use market breadth indicators in conjunction with other forms of bread. technical analysis tools, such as chart patterns and technical indicators, to maximize the chances of success.
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