How can I use market breadth to my advantage?

By Casey Murphy AAA
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.

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