A:

Market breadth is a study that compares the number of companies on a given exchange that have created new 52-week highs to the number of companies that have created new 52-week lows.

When the general trend of the market is upward, traders expect to see the number of new highs drastically outnumber the new lows. A large number of new highs suggests that the buyers are in control of these securities and that demand could spill over into other assets. On the other hand, when the general trend of the market is down, traders expect to see the number of companies forming new lows to be greater than the number of companies creating new highs; this is a sign that there is a greater willingness to sell securities than to buy them.

Using market breadth can be advantageous to traders because it gives a clear picture of what is happening in the market. If the number of new lows is trading at the lower end of its historical range, technical traders expect the general markets to increase. However, if the number of new lows starts to rise above the historically low level, it may be regarded as a sign of a potential correction. It is possible to see the markets continue higher while the number of new lows drastically increases, but this is a situation in which traders tend to be extra cautious as the "smart money" may be exiting the market.

For more information on this see the Market Breadth tutorial.

RELATED FAQS

  1. How are double exponential moving averages applied in technical analysis?

    Learn more about double exponential moving averages (DEMAS), and find out how traders commonly use DEMAs in technical analysis ...
  2. How do I calculate the expected return of my portfolio in Excel?

    Find out how to calculate the total expected annual return of your portfolio in Microsoft Excel using the value and return ...
  3. What are the main factors that affect stocks in the telecommunications sector?

    Read about the factors that drive share prices in the stock market, and learn some of the trends in the telecommunications ...
  4. How do you know where on the oscillator you should make a purchase or sale?

    Learn more about oscillator indicators, technical momentum measures that are used by traders to predict potential market ...
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  5. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  6. Mass Index

    A form of technical analysis that looks at the range between ...

You May Also Like

Related Articles
  1. Trading Strategies

    Uncovering Evidence Of Sector Rotation

  2. Chart Advisor

    Stock Chart Patterns to Keep an Eye ...

  3. Chart Advisor

    ChartAdvisor for July 24 2015

  4. Chart Advisor

    Four Slumping Stocks to Consider Shorting

  5. Chart Advisor

    Stock Breakouts Happening Now or Imminent

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!