What is market breadth?

What is market breadth?

Market Breadth is a descriptor that is used in several market indicators such as the daily breadth, the A/D Line, the McClellan Oscillator, and Arms Index. Breadth is the relative difference in the amount of advancing stocks and declining stocks.

Daily breadth is simply computed by subtracting one from the other, or creating a ratio in which one is divided by the other. Daily breadth is closely related, even interchangeable, with the Advance/Decline ratio. It can also refer to the difference between New Highs and New Lows, or Net New Highs.

Market breadth as an idea, however, is bigger than the one ratio. It is used in a slew of technical analysis techniques, and there is good reason for its popularity. By comparing the number of advancing issues to the number of declining issues, or new highs and new lows, you have an idea of how the market as a whole is moving, and from a different viewpoint than just the numbers from the major stock market indexes.

Most of these indexes are computed by weighting the individual stocks in the computation according to the size of their market capitalization. So larger companies will be given more weight in the movement of the index. Not all indexes work like that, but most do.

Comparing the actual number of advancing stocks to the number of declining stocks gives you a different viewpoint. These computations may also incorporate the amount of trade volume that went toward the advancing or declining issues, which can help make a breadth indicator an even better indicator of momentum.

Momentum is a large part of what A/D and breadth are attempting to read, but on a market-wide scale instead of searching for trends in individual securities. Differences in these numbers over many days form a breadth line or advance/decline line.

What is the Absolute Breadth Index?
What is the On-Balance Volume Indicator?