The Absolute Breadth Index (ABI) is a market breadth indicator, calculated using the absolute value of the difference between the number of advancing stocks and declining stocks to indicate the size of market movement without considering price direction.
Larger ABI numbers will indicate more volatility. When breadth is smaller, it means that the market isn’t experiencing significant movement, or movement in a definitive direction. When advances or declines pull away from the other, it indicates the presence of market-wide trends.
Market breadth is used in a slew of technical analysis techniques because it gives traders an idea of how an entire market is moving: by comparing the number of advancing issues to the number of declining issues, or new highs and new lows, traders see a bigger picture (and from a different viewpoint than just the numbers from the major stock market indexes).
Other analysis tools use breadth in a directional way, such as the Advance-Decline Line; others may include trading volume in either advancing or declining issues, such as the Arms Index, and others may apply oscillators. The Absolute Breadth Index, however, only shows us that breadth has increased.
To standardize these numbers for historical comparisons, the ABI is expressed as a percentage when the breadth is divided by the total number of issues traded in the market on that day or week. It was intended to be used with the NYSE, but exclusivity may cause the information to be clouded, as stocks account for only about 50% of the securities traded on the NYSE.
The ABI has limited applications because of its focus on market volatility, but investors may still find it useful. An investor who holds a long straddle position with options on a market index, for example, might consider an ABI since the long straddle is not concerned with the direction of movement, only that breadth has increased.
Successful technical analysis requires the ability to recognize and capitalize on directional shifts. Traders use technical indicators like the Absolute Breadth Index to make predictions about future prices. They verify how well a specific indicator works for a particular security.
There is no single indicator that works well for every security, and the ABI is not entirely useful in a vacuum. But while it may only depict volatility, it is very useful if used in conjunction with other tools, like the artificial intelligence offerings from Tickeron. A.I. can provide trade ideas to traders, help analyze signals to execute advantageous trades, and assist investors with making rational, emotionless, and effective trading decisions.
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