How Breadth Indicators Can Predict Stock Market Movement

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Any regular stock market investor knows the value of tracking specific indicators, that give you some idea where, when, and why the market is moving in a different direction.

To get that data, the top traders and money managers on Wall Street often turn to so-called “breadth” indicators (i.e., the number of stock, bonds, or commodities rising or falling during a specific trading session). Often, breadth indicators are known as internal market indicators that compile market data on what, in general, is happening with buyers and sellers in a given market category, at a specific 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 a security is trading higher than the previous trading price, while a downtick means it's trading lower.
  • The advance-decline line indicator uses the same formula as the tick indicator, but tracks a broader range of securities.
  • Breadth indicators can help investors predict cash flow in and out of the market as a whole.

Examples of Breadth Indicators

Traders refer to breadth indicators largely in different ways:

  • Security or index that ends the trading day higher is an “advancing issue” and may be regarded as a bullish market indicator.
  • Security or index that ends the day lower is a “declining issue” and may be considered a bearish market indicator.
  • Market breadth indicators can also track other key trading criteria, like the number of securities closing the trading session at a 52-week high or a 52-week low.

Together, the number of securities that are collectively advancing and declining are market breadth indicators and are widely used by professional investors in their technical analysis research—often on a daily basis. If the majority of the securities tracked by the indicator are “advancers,” then investors expect a rosier market going forward, while a majority of “decliners” would give investors pause, indicating weakening demand for the stocks, bonds, or commodities covered by a given indicator.

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

Essentially, breadth indicators point to a convergence or a divergence in securities markets. If the data reveals a confirmation then the market index being tracked will continue on the path it’s on. If there’s a divergence, then the market path will veer off into a different direction, predicated on the advance-decline data conclusions drawn from the breadth indicator.

Tick Index and Advance-Decline Market Internal Indicators

While there are myriad forms of market breadth indicators, two of the most commonly used by investors, analysts, and traders are the NYSE Tick Index and the Advance/Decline Market Internals indicators.

Tick Indicator

The NYSE Tick Index’s name is derived from the “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 previous trading price. For example, if Facebook (FB) had a previous trading price of $179.25, and a new trading price of $179.75, Facebook would be deemed as an uptick.

A downtick is a trade price lower than the previous trading price. In this instance, if Facebook had a previous trading price of $179.75 and a new trading price of $179.25, it's on a downtick. Consequently, if a tick indicator shows Plus-275, that means 275 securities tracked by the indicator are trading up then trading down. A Minus-275 reading would indicate the exact opposite.

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. If the A/D Indicator posts a 450, that means 450 more stocks are advancing and not declining. A reading of -450 would indicate the exact opposite—450 more stocks are in retreat than are rising, price-wise.

Can Breadth Indicators Predict Future Market Movement?

Surely, breadth indicators can provide much-needed clarity for investors and can lead to more stable and savvy investment outcomes.

As long as investors stick to the script and use breadth indicators as gauges on whether money is going in or out of the market, and not which stocks or other securities are garnering the most money, the breadth indicators can be highly useful.

If you use breadth indicators, make sure you read them as a broad perspective on the market; they cannot predict the performance of any given individual security.

In determining whether more cash is flowing in or out of the market, breadth indicators can be a reliable powerful predictive tool on market movement and momentum—one that can give investors a big edge over the competition on a regular basis.