Market breadth indicators measure internal statistics for a stock index or exchange and provide unique insight to the health of trends. The number and volume for Advancing Issues [A], as well as the number and volume for Declining Issues [D] are components in many popular breadth indicators.
Advance, Decline Tendencies:
- A outpaces D during healthy uptrends
- Expect a rising A line to peak prior to price action, sometimes well before it
- Ratios adjustments for A-D data addresses problems due to changea in the total # of issues
A top resource for understanding breadth is Greg Morris’ 2005 book: “The Complete Guide to Market Breadth Indicators.” Mr. Morris includes practical discussion on a very comprehensive list of indicators
Popular Breadth Indicators
Table 1 provides primary measures used to calculate breadth indicators, along with abbreviations for each.
Table 1 Breadth Component Data
Mr. Morris comments that one of his favorite groups of breadth measures include the McClellan indicators constructed by Sherman and Marian McClellan. He goes further to say that the McClellan Summation Index [MSI] may be the best indicator in the category. Table 2 provides a short-list of popular breadth indicators which includes the standard McClellan Oscillator and MSI, as well as ratio-adjusted versions.
Table 2 Popular Breadth Measures with Construction
The Ratio Adjusted A – D is generally credited to James Miekka—a market technician whose work is often associated with breadth measures.
Focusing on the MSI:
- The breadth measure is generally longer-term in nature
- Both the level and direction of the indicator’s trend are important
- Readings can vary by provider since all values are dependent on the indicator start date
Note that daily data is used for even longer term views since it can be challenging to correctly accumulate the data over a week or month.
Figure 1 displays a daily line chart of the NYSE Composite Index with the Ratio-Adjusted McClellan Summation Index and two simple moving averages [SMAs] for the breadth measure. The compressed image is a bit blurry, but improves in Figure 2. Note Microsoft® Excel® was used to create the line chart with data downloaded from Worden Brothers, Inc.’s TeleCharts® package.
Figure 1 Daily NYSE Composite Index with Ratio Adjusted MSI & Two SMAs (5/2007-4/2011)
The Ratio-Adjusted MSI [RASI] is intentionally faded out because the indicator can fluctuate a good deal making the trend difficult to discern. The two SMAs include:
- RASI 14-day SMA – thinner, orange
- RASI 35-day SMA – thicker, purple
In Figure 1 we can see SMA confirmation of advances and declines during certain periods along with divergences at different times. Figure 2 removes the RASI and shortens the view to 12/28/2010 – 5/4/2012 for a clearer view of current data.
Figure 2 Daily NYSE Composite Index with 14-dy & 35-dy RASI SMAs (12/28/2010 – 5/4/2012)
Both SMAs began to diverge from the advancing NYSE Composite in early February 2012 and continue to confirm moves downward.
Summary & Up Next
Ratio adjustments are made to breadth indicators to address changes in the total number of issues included in exchange data provided over the years. An adjustment to the McClellan Summation Index, along with the data smoothing via simple moving averages, provides a nice view of confirming and diverging breadth action to gauge the health of an existing trend.
Up next: The Arms Index (also known as the Traders Index or TRIN).
Morris, G. (2005). The Complete Guide to Market Breadth Indicators. New York, NY: The McGraw-Hill Companies.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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