Breadth indicators are mathematical formulas that measure advancing and declining issues to calculate the amount of participation in a market movement. By evaluating how many securities are increasing or decreasing in price, and how many trades investors are placing for these securities, breadth indicators can show whether overall market sentiment is bullish or bearish.
Breadth indicators provide traders and investors with a view of an overall market rather than any individual security. For example, the S&P 500 index's market breadth shows how many securities have risen over a given period of time compared to the number that have fallen. This ratio shows how overall investor sentiment is in the United States rather than looking at any specific security in the index.
Breadth indicators are primarily used for two purposes:
There are many different breadth indicators that traders and investors can use in their analysis. The most common is the Advance/Decline Line that which simply subtracts the number of declining stocks from the number of advancing stocks to get net advances over a period of time.
Some other popular breadth indicators include:
Traders and investors may use different breadth indicators for different purposes. For example, On Balance Volume looks at buying and selling pressure from a volume standpoint rather than just looking purely at price, while the McClellan Summation Index involves a more complex formula that generates actual buy and sell signals.
Often times, traders use market breadth indicators in conjunction with other forms of technical analysis, such as chart patterns and technical indicators, to maximize the odds of success. Investors may also use breadth indicators as a gauge of overall sentiment.
The following chart shows two breadth indicators, On Balance Volume and Force Index, on a chart of the SPDR S&P 500 ETF (NYSE ARCA: SPY).
The Force Index (at the bottom) shows a strong bearish sentiment in early February during the market drop and relatively weak bullish sentiment throughout the entire period, while On Balance Volume shows bullish volume during the March recovery and moderate volume in the months following. These indicators suggest that the market is relatively neutral between April and June.