Dancing with the Trend

Advantages and Disadvantages of Using Breadth

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Consider a period of distribution (market topping process) such as 1987, 1999, 2007, 2011, etc. As an uptrend slowly ends and investors seek safety, they do so by moving their riskier holdings such as small cap stocks, into what is perceived to be safer large cap and blue-chip stocks.  This is certainly a normal process and one that can’t be challenged.  However, the mere act of moving from small to large cap stocks causes the capitalization weighted (Nasdaq Composite Index, New York Stock Exchange Index, S&P 500) and price weighted (Dow Jones Industrial Average) to move higher simply because of the demand for large cap and blue chip issues. At one time I found that the top 10 issues based upon capitalization in the Nasdaq 100 accounted for about 47% of its movement.  Breadth, on the other hand, begins to deteriorate from this action.  It is said by Tom McClellan that breadth arrives at the party on time, but always leaves early.  Another analogy is that the troops are no longer following the Generals.


Breadth data seems to not be consistent among the data providers.  If you think about it, if a stock is up it is an advance for the day, so why is there a disparity?  Some data services will not include all stocks on the exchange.  They will eliminate preferred issues, warrants, rights, etc.  This is fine as long as they tell you that is what they are doing.  I use the breadth data provided by the Wall Street Journal and Barron's.  This is the data that StockCharts.com uses.

At the beginning of this century, the number of interest sensitive issues on the New York Stock Exchange was increased so that they account for more than half of all the issues.  These issues are preferred stocks, closed-end bond funds, electric utility stocks, to mention a few.  Many analysts such as Sherman and Tom McClellan, Carl Swenlin, and Larry McMillan use common stocks only breadth indicators. Richard Russell refers to it as an operating company only index.  Using stocks that have listed options available is another good way to avoid the interest sensitive issues, since most stocks that have listed options are common stocks.  I’m not sure if the interest sensitive issues are a problem or not.

Each breadth indicator seems to have its benefits and its shortcomings.  The fact that breadth measures the markets in a manner not possible with price is the key element in these conclusions.  Breadth measures the movement of the market, its acceleration and deceleration.  It is not controlled by General Electric, Microsoft, Intel, Cisco, General Motors, etc.; any more than it is controlled by the smallest capitalized stock on the exchange.

Some indicators are better at Tops, Bottoms, and both; and at different times, but are only identified by Bottoms and/or Tops below.  In my breadth book, great effort was made to determine if one appeared to be better at one or the other.  If no difference could be ascertained, they were reported as being good for both Bottoms and Tops.  Please keep in mind the nature of market bottoms versus market tops.  Bottoms are generally sharp and quick and usually much easier to identify, whereas market tops are usually long periods of distribution where most market indices rotate through their peaks at different times.  You will notice that considerably more indicators are noted as being good at Bottoms than at Tops.  Add to that the subjective interpretation of the various indicators should be viewed as a beginning guide only.

Favorite Breadth Indicators

Here is a list of breadth indicators that I believe are good ones to follow.  Some are for daily analysis and some are used merely to be kept aware of their indications.  There are some decent breadth indicators that have made some very good market calls over the years – they are marked as awareness only below.  I try to avoid noisy indicators that require too much interpretation and also ones that are very short term in nature.

Breadth Indicator                                                          When Used

Advance Decline Line                                                   long term and usually early

Advance Decline Line Normalized                            good breadth overbought oversold

Breadth Thrust                                                               awareness only

Eliades Sign of the Bear                                               awareness only

New Highs New Lows Line                                          long term trend

New Highs New Lows (Chart 7-17)                           intermediate trends

McClellan Oscillator                                                     short to intermediate

McClellan Summation with Miekka adj.                 longer term and market staying power

Moving Balance Indicator                                           very good for bottoms (oversold)

Swenlin Breadth Momentum                                     short term picture

Trend Exhaustion Index                                               good for topping alert

Up Volume (smoothed)                                               good for the beginning of market tops

WTrin10                                                                           short term overbought oversold

Zahorchak Method                                                       good for trend following

Zweig Up Volume Indicators                                      awareness only

All of these indicators are available in my Market Breadth ChartPack including all the indicators in my book, The Complete Guide to Market Breadth indicators.  And they are all available in StockCharts.com’s symbol catalog.  Here is the symbology:

!BI          They all start this way; exclamation point followed by Breadth Indicator (BI).

Next is either NY for New York, NA for Nasdaq, or TO for Toronto.

Finally, in an attempt to help identify the indicator, for example the NYSE Breadth Thrust is:

!BINYBT

If you enter !BI in the search you will see all of them.  In order to see just the Nasdaq breadth indicators; enter !BINA.

Note: Tom McClellan wrote an entire chapter in my breadth book; which is worth the $19.99 price alone.

Dance with the Trend,

Greg Morris

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Greg Morris
About the author: has been a technical market analyst for over 45 years ranging from analysis software development, to website analysis and education, to money management. He has written four books: Candlestick Charting Explained (and its companion workbook), The Complete Guide to Market Breadth Indicators, and Investing with the Trend. A graduate of the Navy Fighter Weapons "Top Gun" School, Greg is a former Navy fighter pilot who flew F-4 Phantoms on the USS Independence.  He also holds a degree in Aerospace Engineering from the University of Texas. Greg has a long history of understanding market dynamics and portfolio management. Learn More
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