Market breadth indicators measure the number of stocks participating in a market move. While price indexes like the S&P 500 tell you where the market is going, breadth indicators tell you how many stocks are going along for the ride. This distinction is crucial for assessing market health.
What is Market Breadth?
Market breadth looks beyond the price of major indexes to see how many individual stocks are advancing or declining. Healthy markets have broad participation, while unhealthy markets often show narrow leadership.
Why breadth matters: Market indexes can be misleading because they are often dominated by a few large stocks. The S&P 500 could be at new highs while most stocks are actually declining. Breadth indicators reveal this hidden weakness.
The Advance/Decline Line
The most fundamental breadth indicator:
How It Works
- Daily calculation: Advancing stocks minus declining stocks
- Cumulative line: Running total of daily values
- Rising A/D line: More stocks advancing than declining
- Falling A/D line: More stocks declining than advancing
Interpreting the A/D Line
- A/D line rising with market = healthy rally, broad participation
- A/D line falling with market = healthy decline, broad weakness
- A/D line falling while market rises = warning sign, narrow leadership
- A/D line rising while market falls = possible accumulation
Bearish Divergence Example
In late 2021, the S&P 500 made new all-time highs.
However, the advance/decline line was making lower highs.
This bearish divergence warned that fewer stocks were participating in the rally.
The market subsequently declined in early 2022.
Other Key Breadth Indicators
Advance/Decline Ratio
- Advancing stocks divided by declining stocks
- Above 1.0 = more advancers than decliners
- Below 1.0 = more decliners than advancers
- Extreme readings may signal reversals
Breadth Thrust
- Measures the intensity of buying
- Strong thrusts often signal new bull markets
- Rare but powerful signal when triggered
- Look for 10-day A/D ratio above 2.0
Up/Down Volume Ratio
- Volume in advancing stocks vs. declining stocks
- Shows where the money is flowing
- High ratios = aggressive buying
- Low ratios = aggressive selling
Warning: Divergences Can Persist
Breadth divergences can persist for weeks or months before the market corrects. Use divergences as a warning sign to be more cautious, but do not use them as precise timing tools. The market can stay irrational longer than expected.
Using Breadth for Market Analysis
Confirming Uptrends
- A/D line should make new highs with price
- Majority of stocks above their moving averages
- New highs exceeding new lows
- Up volume greater than down volume
Warning Signs in Uptrends
- A/D line failing to confirm new highs
- Fewer stocks above their moving averages
- New highs decreasing while index rises
- Rally led by small number of stocks
Confirming Downtrends
- A/D line should make new lows with price
- Majority of stocks below their moving averages
- New lows exceeding new highs
- Down volume dominant
Signs of Bottoming
- A/D line refusing to make new lows
- Breadth improving while index makes new lows
- New lows decreasing
- Breadth thrusts occurring
Breadth Trading Strategies
Breadth Confirmation Strategy
- Only take long positions when breadth confirms
- Reduce exposure when breadth diverges
- Use breadth to filter trade setups
- Increases win rate by trading with market support
Breadth Thrust Strategy
- Look for extreme breadth readings after corrections
- Strong breadth thrusts often signal new uptrends
- Enter long positions after thrust signals
- Rare but high-probability setups
Sector Breadth
Apply breadth analysis to individual sectors:
- Compare sector breadth to index breadth
- Strong sector breadth = sector leadership
- Weak sector breadth = sector lagging
- Rotate into sectors with improving breadth
Track Market Breadth With Your Portfolio
Pro Trader Dashboard helps you monitor how your positions align with market internals.
Summary
Market breadth indicators measure the number of stocks participating in market moves. The advance/decline line is the foundation of breadth analysis, tracking the cumulative difference between advancing and declining stocks. When breadth confirms price action, trends are more likely to continue. When breadth diverges from price, it often warns of impending reversals. Use breadth as part of your overall market analysis toolkit.
Learn more: New Highs vs New Lows and McClellan Oscillator.