When the S&P 500 hits a new high, is the whole market really rallying, or are just a handful of mega-cap stocks carrying the weight? Market breadth analysis answers this question by measuring how many stocks are participating in a market move. Understanding breadth indicators can help you identify strong trends, spot potential reversals, and make better trading decisions.
What is Market Breadth?
Market breadth refers to the number of stocks advancing versus declining in a given market or index. It measures the overall participation in a market move. When most stocks are moving in the same direction as the index, breadth is considered strong. When only a few stocks are driving the index while most others lag, breadth is considered weak.
Key insight: A rising market with strong breadth is healthier than a rising market with weak breadth. Divergences between price and breadth often signal potential reversals.
Why Market Breadth Matters
Price alone does not tell the whole story. Here is why traders pay attention to breadth:
- Confirms trend strength: When breadth aligns with price movement, the trend is more likely to continue
- Warns of potential reversals: Narrowing breadth during a rally often precedes market tops
- Identifies buying opportunities: Strong breadth during pullbacks suggests the overall trend remains intact
- Filters false breakouts: A breakout supported by strong breadth is more reliable than one with weak participation
Key Market Breadth Indicators
1. Advance-Decline Line (A/D Line)
The advance-decline line is a cumulative measure of the difference between advancing and declining stocks each day. It is one of the most widely followed breadth indicators.
How to Read the A/D Line
- A/D line rising with the market = healthy uptrend
- A/D line falling while the market rises = potential warning sign
- A/D line making new highs before the index = bullish confirmation
- A/D line making lower highs while the index makes higher highs = bearish divergence
2. Advance-Decline Ratio
This ratio divides the number of advancing stocks by the number of declining stocks. A ratio above 1 means more stocks are advancing than declining. Extreme readings can signal overbought or oversold conditions.
3. New Highs vs New Lows
This indicator tracks how many stocks are making 52-week highs versus 52-week lows. In a healthy bull market, new highs should consistently outnumber new lows. A surge in new lows during a rally is a red flag.
4. Percentage of Stocks Above Moving Averages
This measures what percentage of stocks are trading above their 50-day or 200-day moving average. When over 70% of stocks are above their 50-day MA, the market has strong breadth. Below 30% suggests weak breadth.
Breadth Threshold Guidelines
- Above 80% of stocks over 50-day MA = potentially overbought
- 70-80% = strong bullish breadth
- 50-70% = neutral breadth
- 30-50% = weak breadth
- Below 30% = potentially oversold
5. McClellan Oscillator
The McClellan Oscillator uses exponential moving averages of the advance-decline data to create a momentum indicator. Positive values indicate bullish breadth momentum, while negative values suggest bearish momentum.
How to Use Breadth in Your Trading
Confirming Index Breakouts
When an index breaks out to new highs, check breadth indicators to confirm. A breakout with expanding breadth (more stocks participating) is more likely to sustain. A breakout with contracting breadth may be a false signal.
Spotting Divergences
One of the most valuable uses of breadth analysis is spotting divergences. When the index makes new highs but breadth indicators do not confirm, it often precedes a correction.
Real World Example
In early 2020, the S&P 500 was making new highs, but the percentage of stocks above their 200-day moving average was declining. This negative divergence warned traders before the February-March selloff.
Identifying Washout Lows
Extreme negative breadth readings can signal capitulation. When fewer than 10% of stocks are above their 50-day moving average, the market is often oversold and due for a bounce.
Breadth Thrust Signals
A breadth thrust occurs when market breadth moves from extremely oversold to extremely overbought in a short period. This rare but powerful signal often marks the beginning of significant rallies.
Zweig Breadth Thrust: When the 10-day EMA of advancing issues divided by advancing plus declining issues moves from below 0.40 to above 0.615 within 10 trading days, it signals a breadth thrust. Historically, this has preceded strong market gains.
Common Mistakes to Avoid
- Using breadth in isolation: Breadth works best when combined with price action and other indicators
- Ignoring timeframes: Short-term breadth can differ significantly from long-term breadth
- Expecting immediate reactions: Divergences can persist for weeks or months before resolving
- Forgetting sector context: Sometimes weak breadth reflects sector rotation, not market weakness
Tools for Tracking Market Breadth
Several free and paid resources provide breadth data:
- Stock exchange websites (NYSE, NASDAQ) publish daily advance-decline data
- Financial data providers like Barchart and StockCharts offer breadth charts
- Trading platforms often include breadth indicators in their charting tools
- Market breadth ETFs like the Invesco S&P 500 Equal Weight ETF can serve as a breadth proxy
Monitor Market Breadth and Your Portfolio
Pro Trader Dashboard helps you track market conditions alongside your portfolio performance. See how your positions align with overall market health and make informed trading decisions.
Summary
Market breadth analysis is an essential tool for understanding what is really happening beneath the surface of index movements. By monitoring breadth indicators, you can confirm trends, spot potential reversals, and avoid being fooled by narrow rallies. The key is to use breadth alongside other analysis methods and understand that divergences may take time to resolve.
Want to dive deeper? Learn about the Advance-Decline Line or explore the McClellan Oscillator for more detailed breadth analysis.