Apr 20, 2023
Market breadth is a measure used in technical analysis to assess the overall health and strength of a stock market or a particular market index. It provides insights into the level of participation or the degree of broad-based buying or selling in the market.
Market breadth is a measure used in technical analysis to assess the overall health and strength of a stock market or a particular market index. It provides insights into the level of participation or the degree of broad-based buying or selling in the market. Market breadth can be measured using various indicators, such as the advance-decline ratio, the advance-decline line, the McClellan Oscillator, and the cumulative volume index, among others.
Market breadth can be indicative of the underlying sentiment and momentum of the overall market. A strong market breadth suggests that a large number of stocks or components within an index are participating in an upward trend, indicating broad-based buying and positive sentiment. This may suggest that the overall market is healthy and likely to continue its upward trend. Conversely, weak market breadth may signal that fewer stocks or components are participating in a market move, indicating a lack of widespread buying interest and potential weakness in the overall market.
Market breadth can also provide insights into potential market reversals or trend changes. Divergence between market breadth indicators and the price movements of the overall market or a specific index may indicate a weakening trend or an upcoming reversal. For example, if an index is reaching new highs, but the advance-decline ratio or advance-decline line is showing a negative divergence, it may suggest that the market rally is not well supported by widespread buying, and a trend reversal could be imminent.
Market breadth can be calculated using various indicators, and the specific calculation method depends on the indicator being used. Here are some examples of commonly used market breadth indicators and how they are calculated:
1. Advance-Decline Ratio: The advance-decline ratio is calculated by dividing the number of advancing stocks by the number of declining stocks within a given market or index. The formula is:
Advance-Decline Ratio = (Number of Advancing Stocks) / (Number of Declining Stocks)
A value greater than 1 indicates that more stocks are advancing than declining, suggesting positive market breadth, while a value less than 1 indicates the opposite.
2. Advance-Decline Line: The advance-decline line is a cumulative measure that calculates the difference between the number of advancing stocks and the number of declining stocks on a daily basis, and then adds or subtracts the difference to a running total. The formula is:
Advance-Decline Line = (Cumulative Advancing Stocks) - (Cumulative Declining Stocks)
The advance-decline line provides a visual representation of the cumulative breadth of a market or an index over time.
3. McClellan Oscillator: The McClellan Oscillator is a market breadth indicator that uses the difference between the 19-day exponential moving average (EMA) and the 39-day EMA of the advance-decline ratio. The formula is:
McClellan Oscillator = (19-day EMA of Advancing Stocks - 39-day EMA of Advancing Stocks) / (19-day EMA of Advancing Stocks + 39-day EMA of Advancing Stocks)
The McClellan Oscillator oscillates around a zero line, with positive values indicating positive breadth and negative values indicating negative breadth.
4. Cumulative Volume Index (CVI): The CVI is a market breadth indicator that measures the cumulative volume of advancing stocks versus declining stocks. The formula is:
CVI = (Cumulative Volume of Advancing Stocks) / (Cumulative Volume of Declining Stocks)
A CVI value greater than 1 suggests positive breadth, while a value less than 1 suggests negative breadth.