What is Market Breadth?
The term market breadth can be applied to a number of different entities; and it basically helps to understand the “internal strength” of the market. It is a technical analysis concept that measures the participation level of individual stocks in a market’s price movement. It compares the number of advancing (rising) stocks to declining (falling) stocks to determine if a rally is broad-based and sustainable, or if it’s driven by a few large companies, which could indicate underlying weakness. A positive market breadth occurs when more stocks are rising, suggesting bullish momentum, while a negative reading indicates more stocks are falling, suggesting bearish sentiment.
How to Measure Market Breadth?
There are a few technical analysis indicators that can be used to measure the market breadth:
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Advance-decline (A/D) ratio: The ratio of the number of advancing stocks to declining stocks.
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Advance-decline line (AD Line): A cumulative line that tracks the A/D ratio over time.
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Percentage of stocks above a moving average: The percentage of stocks in an index trading above their 50-day or 200-day moving averages.
Market Breadth in BullCharts
In BullCharts software market breadth can be shown on the price chart using the Advance/Decline indicator.
The supporting script description in this indicator says: “[Description=”A technical indicator that plots changes in the value of the advance-decline index over a certain time period. Each point on the chart is calculated by taking the difference between the number of advancing/declining issues and adding the result to the previous period’s value, as shown by the following formula:
A/D Line = (# of Advancing Stocks – # of Declining Stocks) + Previous Period’s A/D Line Value”]
LoadSymbol(“_ADV”,C) – LoadSymbol(“_Dec”,C) + (Hist(LoadSymbol(“_ADV”,C),1) – Hist(LoadSymbol(“_Dec”,C),1));
In addition to this, it is calculated using daily price data across the whole of the market.
How to use this?
A number of experts report that it is not easy to utilise Market Breadth information directly within a mechanical trading strategy. However, it could be used in a strategy as a market filter, or to give confidence about overall market direction, or market health.