Measuring the overall strength
Breadth indicators are measuring the overall strength of a price action or an existing trend by analyzing the proportion of the overall stocks or volume that are participating in the market’s up or down move. Some measures of market breadth involve the volume of rising stocks compared to the volume of falling stocks.
Rising stocks should be getting the most of volume in a healthy strong market. The same is true with the amount of advancing stocks compared to declining stocks. Positive market breadth occurs when more stocks are moving higher than are moving lower, and it is used to suggest that the condition of the market is healthy.
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Examples of Different Breadth Indicators Offered by WallStreetCourier
Upside-/Downside Volume Index Daily/Weekly
If prices move steadily upward (strong uptrend) with strong volume, this indicates that buyers are accumulating shares. A healthy market should be supported by strong up volume. If not there is a negative divergence between the market and breadth. This could happen, if only heavy weighted stocks in an index are pushing the market higher but the majority of small weighted stocks are already being sold by investors.
By separating the up volume from the down volume, investors can design internal indicators to support their assertions about the direction of the given index or market. Divergences between the market and volume should be monitored closely as a trend reversal could be ahead! |
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High-/Low Index Weekly
The Global Futures Trend Indicator calculates the amount of stocks listed on NYSE which are reaching daily new highs or daily new lows. As long as the gauge of this index stays above the 60% level there is a solid bullish trend in progress. |
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The Advantage and the Complicacy of Breadth Indicators
Breadth indicators are designed to point out unusual conditions but they cannot exactly categorize them by length and severity. A divergence does not necessarily lead to a major price reversal. Nevertheless breadth indicators could be an important red flag on the horizon for traders. |
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