Market Breadth in Technical Trading
Market breadth helps traders understand the strength of overall market moves, beyond individual stock performance. It's a key measure of market participation.
🌐 What is Market Breadth?
Market breadth measures the number of stocks participating in a market move. It answers the question: Is the market rally driven by a few large stocks, or is it broad-based with wide participation? Traders use breadth indicators to confirm trends or spot potential reversals.
🔍 Why Market Breadth Matters
- Strong breadth confirms that a majority of stocks support the market's direction.
- Narrow breadth suggests vulnerability — the rally or decline may lack support.
- Divergence between breadth and price often signals weakening trends.
- Breadth helps identify early signs of market tops or bottoms.
🛠️ Popular Market Breadth Indicators
Advance/Decline Line (A/D Line)
Tracks the net difference between advancing and declining stocks. A rising A/D Line confirms a healthy uptrend.
McClellan Oscillator
A momentum indicator based on advancing and declining issues. Helps identify overbought or oversold market conditions.
Advance/Decline Ratio
Shows the ratio of advancing stocks to declining stocks. Ratios above 1 suggest bullish breadth.
New Highs/New Lows
Compares the number of stocks hitting new 52-week highs vs. lows, helping gauge market strength or weakness.
📌 Market Breadth in Action
Imagine the index is making new highs, but the number of advancing stocks is shrinking. This negative divergence suggests the rally may be losing strength and could reverse.
Summary
Market breadth provides essential context for price action. By monitoring participation, traders gain insights into the sustainability of trends and potential market turning points.