How Breadth Indicators Can Predict Stock Market Movement

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Any regular stock market investor knows the value of tracking indicators to give you some idea where, when, and why the market is moving. The top traders and money managers on Wall Street often turn to “breadth” indicators to get that data.

Breadth indicators show the numbers of stocks, bonds, or commodities that are rising or falling during a trading session. They're often known as "internal market indicators." They compile market data on what's happening with buyers and sellers in a given market category at a given point in time.

Key Takeaways

  • Breadth indicators are assemblages of data that point to a convergence or a divergence in securities markets.
  • An uptick indicator means that a security is trading higher than the prior trading price. A downtick means that it's trading lower.
  • The advance-decline line indicator uses the same formula as the tick indicator, but it tracks a broader range of securities.
  • Breadth indicators can help investors predict cash flow into and out of the market as a whole.

Examples of Breadth Indicators

Traders don't always refer to breadth indicators in the same way. A security or index that ends the trading day higher is an “advancing issue.” This may be regarded as a bullish market indicator. A security or index that ends the day lower is a “declining issue.” It may be thought to be a bearish market indicator.

Market breadth indicators can also track other key trading data, such as the number of securities closing the trading session at a 52-week high or a 52-week low.

The number of securities that are collectively advancing and declining are market breadth indicators. They're widely used by investors in their technical analysis research, often on a daily basis. Investors expect a good market going forward if most of the securities tracked by the indicator are “advancers.” Many “decliners” would give investors pause, indicating weakening demand for the stocks, bonds, or commodities covered by a given indicator.

Breadth indicators often cover entire indexes, like the New York Stock Exchange, NASDAQ, or any securities market index, sector, or industry.

Breadth indicators point to a convergence or a divergence in securities markets. The market index being tracked will stay on the path it’s on if the data reveals a confirmation. The market path will veer off in a different direction if there's a divergence, based on the advance-decline data conclusions drawn.

Tick Index and Advance-Decline Market Internal Indicators

There are many forms of market breadth indicators, but the NYSE Tick Index and the Advance/Decline Market Internals indicators are two of those most used by investors, analysts, and traders.

The Tick Indicator

The NYSE Tick Index’s name is derived from “ticks,” the actual trading price movement of a given security or index at any given time as measured by upticks and downticks. An uptick denotes a security that’s trading higher than the prior trading price. For example, Meta (FB), formerly Facebook, would be deemed as an uptick if it had a prior trading price of $179.25 and a new trading price of $179.75.

A downtick is a trade price lower than the prior trading price. Meta would be on a downtick in this case if it had a prior trading price of $179.75 and a new trading price of $179.25. A tick indicator that shows Plus-275 means 275 securities being tracked are trading up then trading down. A Minus-275 reading would imply the opposite.

The Advance-Decline Line Indicator

The Advance-Decline Line Indicator is much more comprehensive in the number of securities it tracks. The formula is the same as the Tick Indicator, weighing the value of the stock market based on the number of advancing securities against declining securities. It means that 450 more stocks are advancing if the A/D Indicator posts a 450. They're not declining. A reading of -450 would point to the opposite, that 450 more stocks are in retreat than rising pricewise.

Can Breadth Indicators Predict Future Market Movement?

Breadth indicators can provide much-needed clarity for investors and can lead to more stable and savvy investment outcomes. They can be highly useful if you stick to the script. Use them as gauges on whether money is going in or out of the market, not which stocks or other securities are earning the most money.

Make sure you read breadth indicators as a broad perspective on the market if you use them. They can't predict the performance of any particular security.

Breadth indicators can be reliable, powerful, predictive tools for assessing market movement and momentum when you're trying to pin down whether more cash is flowing into or out of the market. They can give you a big edge over the competition on a regular basis.

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