Market breadth is one of the core concept you must understand if you want to succeeds in trading and investing in stock market . A comprehensive understanding of market breadth will help you trade confidently in any time frame.
What is market breadth
Market Breadth simply tells you how many stocks are going up, how many going down, and how many are unchanged. There are variations of the basic breadth idea like measuring number of new highs and new lows, or measuring the up volume and down volume. But ultimately all breadth indicators mathematically are derivatives of :
A D and U
A= number of advancing stocks
D= number of declining stocks
U= unchanged
Different people have massaged this data in various ways by using variety of mathematical techniques like moving average, exponential moving average, ratio analysis, standard deviation and so on to develop number of breadth based indicators.
Why is market breadth called the grand daddy of all indicator
Because it is internally driven information, it tells you objectively the participation of stocks in a market move. Sometime one of the indexes can be positive as the index are calculated by price weightage or capitalisation weight age, but breadth does not lie. Breadth treats all issues equal.
So because Dow Jones is price weighted , if say the 10 highest priced stocks are up big , it can be positive . even if remaining 20 stocks are down for the day. In such a case the breadth will tell you real story. The breadth will be 10/20.
Breadth tells you immediately the strength and direction of a move in the market. A market in which more stocks are going up compared to going down and more stocks making new high compared to new low is a good bull market.
What information does market breadth tells you
Market breadth tells you how many stocks are participating in a move. If you measure breadth using say new high or new low, it tells you the direction of major stocks. If you measure breadth using volume , it tells you the extent of participation in a move.
How is market breadth calculated
Primarily breadth is calculated by tracking advance decline and/ or new high new low and/or advancing volume and declining volume.
To calculate advance decline you need:
- Total stocks available for trading in the market (T)
- Advancing stocks or advances (A)
- Declining stocks or decliners (D)
- Unchanged (U)
To calculate advance/decline volume
- Advancing Volume or Up volume (UV)= total volume of (A)
- Declining volume or Down volume (DV)= total volume of (D)
- Total volume = total of all volume traded for the day for all stocks
To calculate new high/new low
- New high (h)= number of stocks making 52 week high
- New Low (l)= number of stocks making 52 week low
All market breadth based commonly available indicators in the market are derived using this basic data. After taking this basic data people massage it in different way to create their own "proprietary " indicators.
Market Breadth simply tells you how many stocks are going up, how many going down, and how many are unchanged. There are variations of the basic breadth idea like measuring number of new highs and new lows, or measuring the up volume and down volume. But ultimately all breadth indicators mathematically are derivatives of :
A D and U
A= number of advancing stocks
D= number of declining stocks
U= unchanged
Different people have massaged this data in various ways by using variety of mathematical techniques like moving average, exponential moving average, ratio analysis, standard deviation and so on to develop number of breadth based indicators.
What are the most commonly used market breadth indicators
Telechart has number of commonly used breadth indicators which most people don't even bother to look at. If you study following Telechart Breadth Indicators, there will be quantum leap in your understanding of market breadth and how to use it to trade profitably. If you understand all the Worden indicators and the concept behind them, you would be master in market breadth analysis.
Worden’s Market Indicators (T2s)
With all of the powerful filtering and organizational capabilities of TeleChart, some of its unique offerings have a tendency to go unnoticed. Our list of 23 Market Indicators is just such an offering. We hope you don't make the mistake of overlooking these useful tools. Most investors are familiar with the advance / decline line, but, with TeleChart, that's just the beginning. TeleChart goes beyond counting the number of stocks moving higher and lower in the market. TeleChart asks "How High?" and "How Low?". TeleChart shows you the percentage of stocks above and below their moving averages. TeleChart even counts stocks attaining new highs versus new lows. TeleChart does it all, so all you do is browse the charts with a few clicks per day.
TeleChart gives you a full toolbox of powerful big-picture indicators designed to help you perfect your market timing. Just as standard technical indicators give you insight into overbought and oversold conditions in individual stocks, this collection of indicators helps you spot trends in the market as a whole, so you can ride the big rallies, and cash in before major market corrections.
Worden’s Market Indicators, known as T2s because each symbol begins with T2, are calculated using the daily market activity of the NYSE. They are internal market statistics which are calculated by counting stocks that meet certain criteria and then publishing the results as a percentage value between 1 and 100. T2107 "Percentage of stocks above their 200-day moving average" for example, counts the number of stocks currently trading above their 200-day price moving average and then plots this as a percentage. So if the daily value of T2107 is 14, you know that 14% of the stocks on the NYSE traded above their 200-day PMA.
Most other indicators and indexes are based on price and will usually give a good reading of the overall trend of the market. T2s, however, are count-based indicators that give you a sort of "behind the scenes" look at the market. By counting every issue on the NYSE, T2s show the true volatility of each issue. They show you things like the fact that advancing issues are outpacing declining issues; when the number of stocks trading above their 200-day price moving average is declining; when the number of stocks reaching new highs each market day is increasing, etc. You can then compare these with a major market index to see how the activity of every stock on the NYSE compares to the trend of the overall market.
When plotting a comparison of a T2 and a market index, you’ll want to set your scaling to Arithmetic. TeleChart will plot the T2 and the market index on independent scales. If you use logarithmic scaling, the T2 and the index are plotted on a common-linked log scale and you won’t be able to compare the true volatility of each.
T2100 Advance/Decline Line
You have probably heard of the advance/decline line. It is calculated by subtracting the number of declining stocks for the day from the number of advancing stocks for the day. It is a cumulative indicator meaning that each day’s calculation is added (or subtracted) from the previous day’s indicator value.
First, our advance/decline line represents a great improvement over the common one. It is calculated only from NYSE common stocks (omitting preferred stocks, warrants, etc., which have a markedly distorting influence). It is calculated from the percentage of advancing stocks minus the percentage of declining stocks, rather than using raw numbers. For example, if 55% of the NYSE were up today and 30% were down, the net change today would be 25 (55% - 30%).
Let’s take a look at a chart. Hit the J key and enter T2100. Set your zoom to level 1 and time frame to a weekly chart. This will display a chart spanning about ten years. Now plot a comparison graph (CTRL-C) using the S&P 500 index (SP-500) as the comparison symbol.
Note: When viewing symbols such as the T2 indicators that only have one price point for each market day (no open, high or low), you’ll want to set the price graph to a line chart. CTRL-B will toggle the chart mode between bar, line and candlestick charts. Press CTRL-B until a line chart is displayed.
Be sure to set the scaling to Arithmetic. The price scale to the right shows the prices for the active symbol (in this case T2100). The price scale of the comparison symbol (SP-500) is not displayed. However, you can swap the active and comparison symbol by pressing CTRL-F. This makes the SP-500 the active symbol and displays its price scale. Press CTRL-F again to make T2100 the active symbol again.
When the advance/decline line rises in lock step with a broad average such as the SP-500, it is an indication that a majority of stocks are in agreement with the strength shown by average. This is called "strong breadth." When the advance/decline line and the broad average decline together, breadth is weak. When the two line disagree, it is called a divergence, and the advance/decline line is more apt to be correct, although it is by no means a certainty.
T2125 Nasdaq Advance/Decline Line
T2126 Nasdaq 100 Advance/Decline Line
T2127 Russell 1000 Advance/Decline Line
T2128 Russell 2000 Advance/Decline Line
T2129 Russell 3000 Advance/Decline Line
T2101 Absolute Breadth Index
This index was developed by Norman Fosback. It is simply the absolute value of the number of advancing issues minus the number of declining issues. For example, if the number of advancing issues is 1200 and the number of declining issues is 600, the Absolute Breadth Index equals 600. If the number of advancing issues is 400, and the number of declining issues is 900, the Absolute Breadth Index equals 500. Remember, the sign is ignored in the calculation of an absolute number.
For charting purposes, we take the daily Absolute Breadth value (calculated as described in the previous paragraph) and publish it as a percentage increase or decrease from the previous day’s value. For example, let’s say yesterday’s Absolute Breadth value was 1000 and the chart shows a value of 31. Now, today’s calculated value comes in at 960, so 960 / 1000 = .96, which is a 4% decrease from the previous day, so today’s reading would be 27, a 4% decrease.
The theory behind the Index is that when the absolute difference between the number of advancing and declining stocks is high, you are more likely to be near a market bottom than a top since a selling climax, with most stocks participating, often occurs near a market bottom. On the other hand, a low Absolute Breadth Index reading is more likely to signify the slow topping activity that frequently occurs at a market peak.
T2102 Bolton-Tremblay Indicator
This is a cumulative advance-decline indicator that uses the number of unchanged issues as a basic component. It is computed in five steps. First, divide the number of advancing issues by the number of unchanged issues. Second, divide the number of declining issues by the number of unchanged issues. Third, subtract the declining ratio from the advancing ratio. Fourth, calculate the square root of the difference. Fifth, add the square root to the previous day’s Bolton-Tremblay Indicator, respecting the sign (plus if there were more advances, minus if more declines).
For example, if there are 1500 advancing issues and 700 declining issues and 800 unchanged issues, the Bolton-Tremblay Indicator is calculated as follows:
Todays’s Bolton-Tremblay Indicator = Yesterday’s Bolton-Tremblay Indicator + Square Root of (1500/800 – 700/800 = Yesterday’s Bolton-Tremblay Indicator + 1
On the other hand, if there had been 700 advancing issues and 1500 declining, today’s Bolton-Tremblay Indicator equals yesterday’s value minus 1.
The Bolton-Tremblay Indicator should be interpreted in a manner similar to the advance-decline line. In fact, if you plot a comparison graph using T2100 as the comparison symbol, the two graphs are almost identical. Keep in mind that the actual value of the indicator is far less important than its trend.
T2103 Zweig Breadth Thrust
Developed by Martin Zweig (The Zweig Forecast, PO Box 5345, New York, NY 10150), this indicator is calculated by taking a 10-day moving average of the number of advancing issues divided by the number of advancing issues plus the number of declining issues. Since it is a percentage indicator, it cannot go below 0 or above 100. However, it is rare that it goes below 40 or above 60.
Greg Morris (G. Morris Corporation, Forest Park Tower, 9500 Forest Lane, Suite 301, Dallas, TX 75243-5914) claims that Martin Zweig says any time this indicator thrusts from below 41 to above 60 in under 10 days that the market will be significantly higher 18 months later. We find the indicator useful as an overbought/oversold indicator, also.
T2104 Cumulative Volume Index
This indicator is sometimes called up volume/down volume. It is calculated by taking the volume of the advancing issues and subtracting the volume of the declining issues. It is a cumulative indicator, so the value is meaningless. This indicator is interpreted the same way the advance/decline line is interpreted. If it begins to trend down while the averages are trending up, it is a bearish sign. If it begins to trend up while the averages are trending down, it is a bullish sign.
T2105 High Low Logic Index
Developed by Norman Fosback, the Index is computed as the lesser of the number of new highs or new lows divided by the total number of issues traded. Daily or weekly NYSE data typically is used in the calculation.
The concept behind the indicator is that either a large number of stocks will reach new highs or a large number will establish new lows, but normally not both at the same time. Since the High Low Logic Index is the lesser of the two ratios, high readings are infrequent.
When a high indicator reading does occur, it signifies that market internals are inconsistent with many stocks reaching new highs at the same time that many stocks establish new lows. Such a condition is considered bearish for stock prices.
Extreme low indicator readings reveal a uniform market. They are considered bullish for stock prices.
T2106 McClellan Oscillator
The McClellan Oscillator is reported each day by many financial news services. Their reported value will almost always be different than our value because, as mentioned earlier, we use every stock on the NYSE. The overall trend of the indicator, however, will be the same.
The McClellan Oscillator is calculated by subtracting a 39 day moving average of (Advances – Declines) from a 19 day moving average of (Advances – Declines). It not only works as an overbought/oversold indicator, it works fairly well at making short-term trend changes when it crosses the zero line.
Here again it is very important that you set your chart scaling to Arithmetic because the McClellan Oscillator will be negative on some market days and negative values cannot be displayed on a Logarithmic scale.
Note: Scaling must be set to Arithmetic for the chart to be displayed properly.
T2118 McClellan Summation Index
The McClellan Summation Index is simply a cumulative indicator of the McClellan Oscillator. It also can be interpreted as bullish or bearish when it crosses over the zero line. We find crossovers on a 10- or 20-day moving average of this indicator to make for a great trend following system. It tends to get you into trends early and keep you in…very few whipsaws.
Note: Scaling must be set to Arithmetic for the chart to be displayed properly.
This next section, beginning with T2107, covers T2s that count the number of stocks on the NYSE trading above or below their moving averages. When plotted against a market index such as the S&P 500 (SP-500) or the Russell 2000 (RUT-X), you can see how the market reacted when large numbers of stocks were trading above or below their moving averages and what patterns to look for in the future.
T2107 Percentage of stocks trading ABOVE their 200-day moving average
In this T2, every stock on the NYSE is represented because (except in rare cases) stocks do not trade exactly AT their 200-day moving average. This is why there is no T2 for "Percentage of stocks trading BELOW their 200-day moving average". One quick glance at the indicator on a day when it reports a value of say 21 instantly tells you that 21 % of stocks on the NYSE are trading above and 79% are trading below their 200-day price moving average.
This is very valuable information because it’s a good general indication of whether the overall market is overbought (spike up in T2107) or oversold (spike down).
T2108 Percentage of stocks trading above their 40-day moving average
Very similar to T2107 above, but this indicator will be a little quicker moving because there is less resistance to a stock breaking out above its 40-day moving average versus its 200-day. Here again there is no complimentary T2 for stocks below their 40-day average because every NYSE stock is covered by this one T2.
T2109 through T2116 indicate the percentage of stocks trading 1 or 2 channels above or below their moving averages. The channels are envelope channels. One channel is equal to one standard deviation from the moving average and two channels equals 2 standard deviations from the moving average.
Tip: When plotting envelope channels on a chart in TeleChart, two parameters have to be entered: Period and Width. The Width parameter determines the number of standard deviations from the moving average (Period parameter) that the envelope channels will be drawn. A Width of 10 equals 1 standard deviation, a width of 20 equals 2 standard deviations, and so on.
These T2s show you the extremes. Stocks that not only are trading above or below their moving averages, but those that have exceeded or fallen below their averages by as much as 2 standard deviations.
T2109 Percentage of stocks trading 1 channel above their 200-day moving average
T2110 Percentage of stocks trading 1 channel above their 40-day moving average
T2111 Percentage of stocks trading 2 channels above their 200-day moving average
In a Worden note on February 18, 1998, Don Worden made some compelling observations of the overall market by plotting a comparison of T2111 and SP-500 (Standard & Poor’s 500 index). Take a look at his comments and the chart of T2111 vs. SP-500 in the online discussion forum at www.worden.com.
T2112 Percentage of stocks trading 2 channels above their 40-day moving average
T2113 Percentage of stocks trading 1 channel below their 200-day moving average
T2114 Percentage of stocks trading 1 channel below their 40-day moving average
T2115 Percentage of stocks trading 2 channels below their 200-day moving average
T2115 points out instances where too many stocks have surged or plummeted at once by showing you what percentage of stocks are trading 2 channels below their 200-day moving average. The channels are envelope channels and each channel represents one standard deviation from the 200-day moving average. To make the count for T2115, a stock must have fallen very far very quickly in recent trading. Peaks in T2115 naturally coincide with lows in the market because if a large number of stocks are trading well below their 200-day moving averages, then the market is going to be down.
To best understand T2115, pull up the chart and plot a comparison graph using the Dow Jones Industrial Average (DJ-30). Set the time frame to weekly and remember to set your scaling to arithmetic when using the T2 indicators compared to a market index for a true picture of volatility. It also helps to pull the upper splitter bar all the way to the bottom of the chart so you can maximize the viewing area of the top window.
Look at the inverse relationship between T2115 and the Dow during the market surge in the second half of 1997. Just after a pullback in the market around April of 1997, the Dow surged from around 6400 to an amazing 8200 points in early August, a 22% increase. The value of T2115 dove from 14 (14% of the market trading below their 200-day averages) to less than 2.
Although you can see this pretty clearly on the chart, you may be asking "So how is this going to help me in the future?" Well, when T2115 spikes up, and assuming the economy is stable, it’s a good indication that there are some good values out there because this also mean that P/E ratios have gone down. Scroll your chart back to 1990 using the history scroll bar at the bottom of the chart. Look at how T2115 spiked up during the pullback in the second half of the year. T2115 peaked as high as 35%, and we haven’t seen a value higher than 14 since. This was just before the Dow took off on its upward run throughout the 1990s.
T2116 Percentage of stocks trading 2 channels below their 40-day moving average
Look for the same patterns described in T2115. Keep in mind that with a 40-day moving average, you will probably see more frequent spikes and higher percentages that with a 200-day moving average but this may give a better short-term picture.
T2117 52-week New High / New Low Ratio
This indicator is calculated as follows: new highs for the last 52 weeks divided by new highs + new lows. Another indicator which moves between 0 and 100, this one gets closer to 0 and 100 than some of the others. It’s a good overbought/oversold indicator as well as a good confirmation/non-confirmation indicator when you plot a moving average of it.
T2120 26-week New High/New Low Ratio
New highs for the last 26 weeks divided by new highs + new lows. Research results have revealed a bullish tendency at extreme high readings and a slightly bearish tendency at extreme low readings.
T2121 13week New High/New Low Ratio
New highs for the last 13 weeks divided by new highs + new lows. Research results have revealed a bullish tendency at extreme high readings and a slightly bearish tendency at extreme low readings.
T2122 4week New High/New Low Ratio
New highs for the last 4 weeks divided by new highs + new lows. Research results have revealed a bullish tendency at extreme high readings and a slightly bearish tendency at extreme low readings.
T2123 Cumulative 4week New High/New Low
This is simply the difference between the number of issues reaching new highs (during a 4-week period) and the number of issues reaching new lows (during the same 4-week period). Research results revealed a slight bullish tendency at extreme high readings and a slight bearish tendency at extreme low readings. However, results were not significant enough to warrant reliance on this indicator for market timing purposes.
T2126 Nasdaq 100 Advance Decline Line
Calculation is the same as T2100.
T2127 Russell 1000 Advance Decline Line
Calculation is the same as T2100.
T2128 Russell 2000 Advance Decline Line
Calculation is the same as T2100.
T2129 Russell 3000 Advance Decline Line
Calculation is the same as T2100.
How can you use market breadth for day trading
At simplest level by using breadth to find oversold or overbought levels or finding divergences. Most of what Dr Brett Steenbarger advocates for day traders to monitor is based on market breadth. He may use different terminology for it but the core concept is market breadth. My observation is that in small time frames breadth tends to mean revert.
If you are really motivated day trader you can develop a Market Monitor or some other more creative kind of breadth indicator for day trading and keep it proprietary. Anything you do in this area you should not discuss publicly as short term systems are very prone to decay, if they become widely known.
How can you use market breadth for swing trading
- Time your swing trades in line with oversold levels on Secondary indicators in Market Monitor.
- Time your swing entries with 10 day low on Indexes
- Exit your trades at overbought levels in secondary indicators.
- In other words buy breakouts after weakness and sell positions in to euphoria.
How can you use market breadth for long term investing
Every major move in a market starts with a breadth change and from extreme breadth. Be bullish when market breadth is extremely negative. Be bearish when market breadth is extremely positive. That is how I use Market Monitor to time my long term retirement accounts.
What are the famous market breadth "proprietary indicators"
90% up or down days Lowry Research
10 day cumulative breadth ratio by Dan Sullivan the Chartist
Ned Davis market timing model
These are famous ones and there are hundreds of others who basically cloak their breadth indicators as "proprietary indicator". If you scratch below the surface it is all based on market breadth.
Which books explain market breadth the best
The Complete Guide to Market Breadth Indicators
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