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. Why is the Breadth Indicator useful for tracking the overall economy?

    See how analysts might use technical breadth indicators to judge the health of the economy as a whole, and learn why one ... Read Answer >>
  2. Why is it important for traders and investors to follow market indicators?

    Learn about market indicators such as the Advance/Decline Index and market breadth. Discover why these indicators are so ... Read Answer >>
  3. What is the "percentage off the 52-week high or low"? How is this calculated?

    The "percentage off the 52-week high or low" refers to when a security's current price is relative to where it has traded ... Read Answer >>
  4. How do I build a trading strategy using the Cumulative Volume Index - CVI?

    Find out how traders and analysts make use of the cumulative volume index, a technical breadth indicator, within their trading ... Read Answer >>
  5. Why is the Toraku Index important for analysts of the Tokyo Stock Exchange?

    Learn how the Toraku Index is used to predict market trends on the Tokyo Stock Exchange, and understand how market breadth ... Read Answer >>
  6. What are the most common market indicators experienced traders follow?

    Take a look at some of the most popular market indicators used by technical analysts, including the advance/decline line ... Read Answer >>
Related Articles
  1. Trading

    Be Aware Of The Hindenburg

    This indicator can protect your profits from going into a tailspin.
  2. Trading

    3 Key Signs Of A Market Top

    Learn the best ways to foresee market corrections and how to profit from them.
  3. Trading

    3 Key Signs Of A Market Top

    When stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
  4. Investing

    August 3, 2012 Market Summary

    Friday, August 3 proved to be a strong day once again for the major index ETFs. Signals are mixed though on different time frames - with certain time frames pointing to a correction, while the ...
  5. Trading

    5 Ways to Identify 2016 Dow Laggards

    These five simple methods will sort 2016 Dow components into leader and laggard lists, allowing analysis of broader market conditions.
  6. Investing

    NASDAQ Posts 2016 High

    The NASDAQ 100 posted a new high for 2016 on the back of rallies in the S&P 500 and DJIA
  7. Investing

    Stocks Reach 52-Week Highs During S&P 500 Rally

    The S&P 500 rising tide lifted these stocks to new highs.
  8. Personal Finance

    A Day in the Life of a Day Trader

    Day trading has many advantages and, while we often hear about these perks, it's important to realize that day trading is hard work.
  9. Investing

    August 10, 2012 Market Summary

    Stock market index ETFs were flat to slightly higher this week. Volume was near the lowest levels seen in the last year though, but close proximity to 52-week highs could attract buying to test ...
  10. Trading

    Are You a Trend Trader or a Swing Trader?

    Swing traders and trend traders execute market timing strategies that require different skill sets.
RELATED TERMS
  1. Market Breadth

    A technique used in technical analysis that attempts to gauge ...
  2. Market Indicators

    A series of technical indicators used by traders to predict the ...
  3. Breadth Indicator

    A mathematical formula that uses advancing and declining issues ...
  4. Breadth of Market Theory

    A technical analysis theory that predicts the strength of the ...
  5. High-Low Index

    An index that seeks to provide confirmation of a market trend ...
  6. 52-Week High/Low

    The highest and lowest prices that a stock has traded at during ...
Hot Definitions
  1. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
  2. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
  3. Nonfarm Payroll

    A statistic researched, recorded and reported by the U.S. Bureau of Labor Statistics intended to represent the total number ...
  4. Conflict Theory

    A theory propounded by Karl Marx that claims society is in a state of perpetual conflict due to competition for limited resources. ...
  5. Inflation-Linked Savings Bonds (I Bonds)

    U.S. government-issued debt securities similar to regular savings bonds, except they offer an investor inflationary protection, ...
  6. Peak Globalization

    Peak globalization is a theoretical point at which the trend towards more integrated world economies reverses or halts.
Trading Center