Market Breadth

Market breadth is a technique used in technical analysis that attempts to gauge the direction of the overall market. Market breadth indicators analyze the number of companies advancing relative to those declining. Positive market breadth occurs when more stocks are advancing than are declining and suggests that the bulls are in control of the market's momentum. Conversely, a disproportional number of declining securities is used to confirm bearish momentum.

A large number of advancing issues is a sign of bullish market sentiment and used to confirm a broad market uptrend. When measuring market breadth, many indicators look at the number of advancing and declining stocks, or stocks that have created a 52-week high or low. This data can provide information about whether the bullish or bearish trend is likely to continue and keep traders and investors on the right side of the broader market’s direction.

Advance-Decline Index: This indicator, also known as the AD line, calculates the difference between advancing and declining stocks. Traders typically look for divergence between the indicator and a major market index, such as the Standard & Poor’s 500 index (S&P 500). For example, if the S&P 500 is rising and the AD index is falling, it indicates the current uptrend may be losing its momentum. On the other hand, if the S&P 500 is falling and the AD index is rising, it suggests that the move lower may be about to reverse.

New Highs-Lows Index: The new highs-lows indicator compares stocks making 52-week highs to stocks making 52-week lows. A reading below 50% indicates that more stocks are reaching their lows compared to stocks that are reaching their highs and could signal a move into a bear market. Contrarian investors may use this market breadth indicator to buy or sell stocks when it gives extreme readings, i.e., below 30% or above 70%.

SPXA200R Index: Traders can use this index to see what percentage of stocks in the S&P 500 are trading above their 200-day moving average. A rising SPXA200R line above 50% indicates broad market strength. Similarly to the new highs-lows Index, traders often look for extreme readings to find overbought and oversold conditions in the broader market. Short-term traders who want a more sensitive moving average to provide earlier signals can use the SPXA50R index that shows what percentage of stock are trading above their 50-day moving average. (To learn more about other breadth indicators, see: Market Breadth: A Directory of Internal Indicators.)