What Does Absolute Breadth Index Mean?
The Absolute Breadth Index (ABI) is a market indicator used to determine volatility levels in the market without factoring in price direction. It is calculated by taking the absolute value of the difference between the number of advancing issues and the number of declining issues. Typically, large numbers suggest volatility is increasing, which is likely to cause significant changes in stock prices in the coming weeks. Market technicians are regular users of an Absolute Breadth Index approach to managing assets. Its methodology falls in line with similar market momentum indicators.
Understanding Absolute Breadth Index (ABI)
The Absolute Breadth Index (ABI) is classified as a breadth indicator because the advancing/declining values are the only values used to create it. This index can be calculated using an exchange or a subset of an exchange, but traditionally the New York Stock Exchange has been the accepted standard.
In reality, the Absolute Breadth Index is a rather crude measure of the market's direction; but it isn't intended to provide a signal beyond the market's volatility. It's this characteristic that's earned the Index the nickname, the going nowhere indicator.
The Absolute Breadth Index vs. the Advance Decline Index
Many will recognize the similarities between the Absolute Breadth Index and the similar, advance decline index. The primary difference between both measures is the difference in how securities advancing are treated relative to those declining, and vice-versa. The Absolute Breadth Index, hence, the name, Absolute, uses the absolute value of securities against one another, rather than the relative values. For instance, if 15 securities advanced and 15 declined during the day, the advance decline index (ratio) would be flat. Suggesting little volatility. The Absolute Breadth Index, however, would highlight the absolute levels of price movements, offering a better picture of true volatility.
No single tool or measure captures the market's many variables, but the Absolute Breadth Index is an improvement over similar back-of-the-envelope approaches.