What you need to know about market breadth | stockbee


What you need to know about market breadth

Extreme positive or negative breadth leads to reversal

When breadth becomes extremely positive or negative such situations resolve in trend change or pullback or correction. In Market Monitor when following things happen it indicates extreme breadth

# of stocks up>25% in a quarter goes below 200 (bullish)

# of stocks down>25% in a quarter goes below 200 (bearish)
# of stocks up>50% in a month goes above 20 (bearish)
# of stocks down>50% in a month goes above 20 (bullish)
% of stocks in confirmed uptrend using Guppy MMA goes below 30 (bullish)

% of stocks in confirmed uptrend using Guppy MMA goes above 70 (bearish)

Such high readings should be interpreted as bullish zone or bearish zones. The actual bullish or bearish reversal may take 8 to 10 days after readings reach such extremes.
Breadth thrust precedes trend change

Breadth thrust means a dramatic change in breadth in short period of time. Breadth thrusts are typically calculated using cumulative breadth. To further refine the breadth thrust smoothing is used along with exponential average of breadth. Then the ratio is further converted in to a oscillator. Zweig Breadth thrust, Absolute breadth Thrust, McClellan Oscillator and many other indicators are based on such breadth thrust calculation. (The actual maths used in doing that is complicated).

Breadth thrust in either direction after a long rally or decline indicates change of trend. In Market Monitor Breadth Thrust is indicated by 10 day ratio.

When the 10 day ratio goes above 2 after market has been in bearish phase for sometime, it indicates bullish breadth thrust and possible change of direction for market.

When the 10 day ratio goes below .5 after market has been bullish for sometime, it indicates a bearish thrust and possible change of direction for market.

Breadth crossover confirm trend change

When breadth turns from positive to negative or the other way, it indicates confirmation of primary breadth trend. In Market Monitor this is indicated by:
# of stocks up>25% in a quarter / # of stocks down>25% in a quarter
# of stocks up>25% in a month / # of stocks down>25% in a month
# of stocks up>13% in 34 days / # of stocks down>13% in 34 days

What happens at the  beginning of a rally

A big 300 plus day on # of stocks up> 4% in day on high volume
Series of 300 plus days in 5to 10 days time frame.
The Cumulative Breadth Ratio goes above 2 confirming start of a bull move.
The Primary Indicator turns bullish
Bottoms tend to be formed suddenly.

What happens at the end of a rally
There is a slow deterioration in breadth on Primary Indicator.
After weeks or month Primary Indicator turns bearish.
The cumulative breadth ratio goes below .5
Real selling starts after that.

Breadth deteriorates slowly at the top

Tops take a long time to form and are difficult to spot. This correction is not following that pattern. I have studied every top in last 40 years or so and seldom market top starts with a crash. 

Breadth suddenly improves at bottom

Market bottoms happen suddenly. Market turns often are a single day phenomenon.

Why it is difficult to understand breadth for beginners

Because lot of concepts in breadth are new to them. Many breadth charts are not interpreted the way most people are used to interpreting charts.

For example Zweig breadth thrust charts are hardly useful because the breadth thrust signal definition is when the readings go up from below 40 to 61.5% that indicates start of a big bull move. The average gain after such breadth thrust is 24% in 11 months post signal. But the signal is very rare. The last Zweig Breadth Thrust signal was on March 23 2009. Before that the breadth thrust gave a signal on August 23 rd 1984. So if you look at Zweig Thrust charts everyday, it is waste of time. 

Similarly interpreting McClellan Summation Index is difficult unless you understand the concept behind it. The charts by themselves of it do not tell you much about how signals are generated. 

I will again advise anyone serious about market breadth to read The Complete Guide to Market Breadth Indicators: How to Analyze and Evaluate market Direction and Strength . It will take you some time to understand and interpret market breadth. 


badar_basim said...

sir i cannot see anything in the new layout you designed for this site

Pradeep Bonde said...

What is it that you cannot see?

badar_basim said...

when i click previous page i can only see half of the old article, the bottom half. i am using firefox

rmike said...

Dear Pradeep,

Came across your blog on the net and would like to tender my appreciation for a down to earth, straight shooting, practical and educative content. Presently in the process of of going through your previous posts and internalizing the concepts. Have been trading for the past couple of years but had a niggling suspicion that I was coming up against a glass ceiling when it came to major turns, time and again. Am a TA purist but your teachings have enabled a fresh perspective fundamental and practical TA attributes.

While it's early days yet (for me) to participate constructively in consonance with your thought process. I would like to submit that the scans as published in your blog (I use a different software than telechart and am presently coding the same for backtesting) may likely be improvrd/ refined by adding a range criteria e.g if the stock thrown up by your scan not only breaks out with higher volume but also the close yesterday was negative, the open today is less than yesterday's close but the sentiment pushes the close today above the open/ high of yesterday (bullish engulfing in TA terms). This can add another confirmatory factor to the breakout. Since we are trying to play with the odds on our side (and reducing cognitive/ choice load), the choice of trading can be further refined.



Pradeep Bonde said...

We have a breakout scan like that and we use it to find breakouts on momentum stocks.

rmike said...

Thanks for the clarification. A couple of premises which have not been covered indepth in your blog are precise entry/ exit rules. Position sizing, trade management and target projection. Would truly be interested in your observations on the subject.