What is market breadth?

Market breadth gauges the health of a market or exchange by analyzing the number of advancing and declining stocks relative to each other. Popular examples would be the New York Stock Exchange (NYSE) breadth, Nasdaq breadth, or even index specific Russell 2000 breadth. A positive breadth reading indicates that more stocks are advancing compared to declining. Negative breadth on the other hand would indicate more stocks are declining relative to the number of stocks advancing. The breadth of a market can help confirm price movement or validate momentum.

Breadth indications can go beyond just advancers and decliners by including volume. This extra information helps paint a more holistic view of what is actually happening. Imagine that there are more decliners than advancers. Breadth would seemingly be negative. But what if under those same circumstances there was twice or even three times as much volume flowing into the advancers relative to the decliners. Certainly good information to have.

Nuances in market breadth

Because most indexes are cap weighted, market breadth may not always align with the direction the index is moving. For example, the S&P 500 (link link link) may have more decliners than advancers, but if the 10 heaviest weighted companies are moving higher and with more volume, the index could be green.

A divergence like this is worth understanding, as it can come as an early warning sign that the market is not as strong as it appears. Traders can choose to be cautious and not initiate new long positions even on a green day, or aggressive contrarians may even take this as a short signal. All traders are in the business of understanding a market move in context, and this added layer is critical to understanding true strength or weakness that is not evident when looking at the index alone.

Common market breadth indicators

Advancers vs decliners – Plots the number of advancing stocks vs declining stocks. The number can be cumulative or reset daily. If cumulative, a positive close is added to the prior close, or if negative subtracted from the prior close.

Advancing volume vs declining volume – Plots the total volume of advancing stocks vs total volume of declining stocks. Like above, this can be cumulative, reset daily, or even be seen in real time. If you are a think or swim user, this script helps plot weekly cumulative volume and this one helps plot the breadth ratio, the real time read.

New highs vs new lows – Plots the number of stocks that are making a new 52 week high vs stocks making a new 52 week low.

Moving Average Breadth – Plots as a percentage of the entire exchange or index, how many stocks are above a particular moving average. Commonly the daily 20, 50, 200 simple moving averages.

McClellan Oscillator – Plots the difference between the 19 day 10% smoothed exponential moving average and 39 day 5% smoothed exponential moving averages of the advance decline line. Oscillator is positive when the 19 day is above the 39 day and negative when the 19 day is below the 39 day.

Summation Index – Plots the cumulative daily value of the McClellan Oscillator and can speak to broader trends in the market.

Conclusion

So look beyond the headline number on any given index. Market breadth, a crucial technical indicator, reveals the true degree of participation. Imagine the index soaring while most stocks stagnate – a few dominant gainers might skew the picture. Breadth acts as a confirmation tool, showing if the market rally is broadly supported or fueled by a select few. This insight will allow you to make better decisions given the context. Hopefully you’ll have an edge in avoiding misleading movements, or even anticipating trend reversals. Remember, breadth is just one piece of the puzzle. Integrate it with other analysis for a comprehensive market view and to always make the best decision possible, with all of the information available.