Technical indicator used to determine the level of participation in price fluctuations of a stock index. Breadth indicators use mathematical algorithms to count the volume of advancing and declining stocks. Breadth indicators can either validate stock index price trends or signal coming price reversals by looking at how many stocks are rising or falling in price and how much volume these stocks are trading.
Overview
Breadth indicators don't provide trade signals, but rather an index's health.
When a breadth indicator and stock index both rise, it indicates high price participation. This suggests the price surge may last.
The opposite is true. A decreasing breadth indicator and a falling stock index indicate lower price participation, suggesting a price decline.
Divergence between breadth and an index may signal a reversal. Fewer stocks following the index means that the stock index could change direction.
Understanding breadth indicator
Breadth indicators give traders and investors a market insight. Stock indexes are used to analyze the market.
For example the S&P 500's Advance/Decline Line shows whether more stocks are gaining or declining. This calculates investor sentiment for all index stocks.
Breadth indicators serve two objectives.
- Breadth indicators can assist predict a market's direction.
- Breadth indicators assist assess trend strength.
Traders and investors can employ several breadth indicators.
Popular breadth indicators
Below are some of the most popular breadth indicators:
- Advance/Decline Line shows whether stocks are increasing or dropping, indicating market sentiment.
- On Balance Volume adds or subtracts volume based on a stock or index's closing price.
- McClellan Summation Index Arms Index (TRIN) focuses at advancing/declining stock ratio/volume ratio.
- Chaikin oscillator depending on volume and pricing.
- Up/Down Volume Ratio is calculated by dividing rising stock volume with declining stock volume.
- Up/Down Volume Spread is calculating by subtracting down volume from up volume.
Traders and investors utilize many breadth indicators. On Balance Volume examines buying and selling pressure based on volume rather than price, whereas the McClellan Summation Index uses a sophisticated formula to provide buy and sell recommendations.
It is possible to use breadth indicators on single stocks or even on other assets, such as the Chaikin Oscillator and On Balance Volume. Other breadth indicators, such Advance/Decline Line or Arms Index, use indexes.
Traders utilize market breadth indicators along with chart patterns and technical indicators to optimize success. For example, if the Advance/Decline Line drops when the S&P 500 is rising, traders will look for the S&P 500 to reverse direction and break below a rising support trend line, or for technical indicators to turn negative. This confirms that the price may be declining, so traders can leave long positions or enter short ones.
Breadth vs. technical indicators
Technical indicators include breadth indicators. Technical indicators have a greater function than breadth indicators, which measure participation and strength. Technical indicators examine volume or price, provide trade signals, and define support and resistance.
Breadth indicators' limitations
Breadth indicators don't always signal reversals. Nor would they confirm a price move even if it keeps going in the same direction.
Most breadth indicators have irregularities. Volume doesn't always grow as prices rise, despite what traders expect. On declining volume or stock participation, trends might endure a long period, leading to divergent breadth indicators but not necessarily a price reversal.
Due to their computation mechanism, several breadth indicators may produce unusual readings. On Balance Volume may spike or decrease dramatically if a heavy volume day ends with a small price change. Price scarcely moved, but the indication did.