No matter what your preferred strategy for navigating the markets, systemic risk will always make your strategies vulnerable to what is happening to the market as a whole. Therefore, in order to be more informed about what current market action is indicating, it is useful to track current market conditions beyond the simple price quotes shown in bottom corner on CNN.
Technical analysis offers an insight into the movements behind the day to day price fluctuations of the total market by tracking the technical condition of individual stocks and combining the scores to achieve an overall picture of what is contributing to the market's move.
The class of indicators that utilize this strategy are often called Breadth Indicators as they measure the extent or range of participation by individual stocks in the market's overall movement.
In this article, I will briefly share some of the popular breadth indicators and how to make your own.
Bullish Percent
Number of stocks on P&F buy signals/total number of stocks
The Bullish Percent Index is calculated by finding the % of stocks on a Point & Figure Buy signal for a given index. For more explanation, visit Point and Figure Explained.
Bullish Percent Indexes are calculated for many different indexes. For example, if you want to know how gold miner stocks are performing as a group, look at the Bullish Percent index for Gold Miners ($BPGDM on stockcharts.com).
When interpreting a Bullish Percent Indicator, look at the historical movements of the indicator alongside the price for that index. This will allow you to determine absolute values to watch. For instance, 70% is commonly marked on a chart of the $BPSPX, as strong bull markets tend to live above this number. You can also identify divergences between the price of the index and the BP index when the BP index is not moving in same direction as price. For example, if the BP stays flat for a few days while price is rising, then the markets may be at risk for a reversal as bullishness has decreased such that more stocks are not entering a bullish state as the index advances.
New High - New Low
Number of stocks at 52-week highs - Number of stocks at 52 week lows
The New Highs-New Lows Index ($NYHL for NYSE) is a popular indicator and can often give hints to future price movements. If there are more stocks being bid up to 52-week highs, than sold down to 52 week lows, then bullishness is likely more prevalent than bearishness in the market.
While you can look at divergences in the $NYHL versus price, I like to watch absolute values. Obviously, the zero level is important to watch as it marks the divide between more 52 weeks than 52 week lows. One can also draw a line at 75, just looking at the chart above, as a surplus of 75 more stocks at 52 week highs than lows often occurs in a strong bull market advance. Drawing lines at negative values can help you track the strength of bearishness in the market as well.
Net Advance-Decline Issues
Number of stocks with a gain for the day - Number of stocks with loss for the day
The $NYAD is another straightforward indicator, shown above in its cumulative form, where each daily value is added to the prior day's $NYAD value to track overall movement through time.
The cumulative $NYAD is most commonly watched for divergences. If price is rising, but net A/D is decreasing then less stocks are participating in the rally, possibly signalling a decline in bullishness.
Customized Breadth Indicators
You can easily make your own breadth indicator if you understand the basic principles of technical analysis. If there is a favorite scan you use to find stocks in some bullish situation, then simply apply that scan to all members of an index, and divide the number in that bullish state over the total in the index.
The POS Indicator on the right column of this website shares the logic of a breadth indicator as it diagnoses the technical state of a select group of indexes and indicators to track current market conditions. For more, visit the Point of Sail Indicator.
Moreover, the BPTOT is a custom bullish percent indicator I report alongside the POS that applies the logic of the Bullish Percent calculation to three indexes that I have chosen. Using stockcharts.com, I scan for the number of stocks for selected indexes on a P&F buy signal and then divide the result by the total number of stocks in the index I select.
For my private use, I also utilize a Bullish vs. Bearish Issues indicator inspired by the New Highs-New Lows Index. In this case, for a select index, I run a scan for a bullish set of conditions and a scan for a bearish set of conditions. The two values are charted here:
I can then subtract the two values to have a New Highs-New Lows-like indicator.
It is well worth studying breadth indicators to improve your understanding of the markets. Having a tool set of breadth indicators will help keep you informed about current market conditions beyond the daily price fluctuations.
