ADVANCED CONCEPTS IN CHARTING - Section 3 - Chapter 18 Part I - Market Breadth Indicators

1. Module - 31
Measuring Market
Strength
CMT LEVEL - I

2. Breadth Indicator – Market Strength
• Advance/decline data is called the "breadth" of the stock market
• If a closing price is above its previous close, it is considered to advancing, or
an "advance." Similarly, a stock that closes below the previous day's close is a
declining stock, or a "decline.“
• The indicators we will focus on in this section measure the internal strength of
the market by considering whether stocks are gaining or losing in price.
• cumulative breadth line,
• the advance-decline ratio,
• breadth differences
• breadth thrust.

3. The Breadth Line or Advance-Decline Line
•The breadth line, also known as the advance-decline
line, is one of the most common and best ways of
measuring breadth and internal market strength
• This line is the cumulative sum of advances minus
declines.
•Breadth Line Value = ( Advancing Stocks - Declining
Stocks) + Breadth Line Value

4. The Breadth Line or Advance-Decline Line
•On days when the number of advancing stocks exceeds
the number of declining stocks, the breadth line will rise.
•On days when more stocks are declining than advancing,
the line will fall
•A breadth line can be constructed for any index, industry
group, exchange, or basket of stocks.
•In addition to being calculated using daily data, it can be
calculated weekly or for any other period of time for
which breadth data is available

5. The Breadth Line or Advance-Decline Line
• When the stock market averages are rising, the breadth line should be
rising. This would indicate that a market rally is associated with the
majority of the stocks rising.
• The importance to technical analysts of the breadth line is the time
when it fails to replicate the averages and, thus, diverges.
• For example, if the stock market average is rising but the advance-decline
line is falling, the rally likely is being fuelled by a few big company stocks,
but the majority of stocks are either not participating or declining in
value.

6. What is Divergence?
• Divergence is when the price of an asset is moving in the
opposite direction of a technical indicator, such as an oscillator,
or is moving contrary to other data.
• Divergence warns that the current price trend may be
weakening, and in some cases may lead to the price changing
direction.
• There is positive and negative divergence.
• Positive divergence indicates a move higher in the price of the
asset is possible.
• Negative divergence signals that a move lower in the asset is
possible.

7. Divergence

8. Double Negative Divergence
• When the averages are reaching new price highs and
the breadth line is not , a negative divergence is
occurring.
• A negative divergence signals a market top , a markets
top can occur without a divergence.

9. Double Negative Divergence

10. Cumulative breadth line
• one that has no relationship to the previous breadth line, begins
once the market reaches a major low.
• The cumulative breadth line, for divergence analysis, starts again
once a major decline has occurred.
• When the market declines into a major low, one of the four-year
varieties, analysis of the cumulative breadth line begins a new, and
the line has no relationship to the peak of the previous major
market cycle.

11. Cumulative breadth line
• A negative divergence, while not being required, has
been the most successful method over the past 50 or
more years for warning of a major market top.
•As with most indicators, different technicians use the
breadth indicators in slightly different ways.

12. Cumulative breadth line
• A negative divergence, while not being required, has
been the most successful method over the past 50 or
more years for warning of a major market top.
•As with most indicators, different technicians use the
breadth indicators in slightly different ways.

13. Breadth Oscillators
McClellan
Oscillator
McClellan
Ratio Adjusted
Oscillator
McClellan
Summation
Oscillator
Plurality Index
Absolute
Breadth Index
Unchanged
Issue Index

14. McClellan Oscillator
• McClellan Oscillator is an indicator used in Market Breadth
Analysis to track changes in the number of the advancing
(Advances) and the number of declining (Declines) stocks.
• McClellan oscillator has been developed by Sherman and Marian
McClellan in 1969.
• McClellan Oscillator = (19-day EMA of advances minus declines) -
(39 day EMA of advances minus declines)
where "advances" (advanced stocks) is the number of the stock
which are traded above their previous day close and "declines"
(declined stocks) is the number of the stocks traded below their
previous day close.

15. Mechanics behind McClellan Oscillator

16. Mechanics behind McClellan Oscillator
• When 19-day AD line starts to decline (Point A) - McClellan
Oscillator starts to decline in this case as well - we
understand that we have short-term decline in the number
of advancing stocks.
• When 19-day AD line crosses below 39-day AD line (Point B)
- McClellan Oscillators crosses below zero line in this case -
we consider that drop in the number of the advancing stock
is strong enough to consider it as a predictive signals of a
reversal down in the NYSE index trend.

17. Mechanics behind McClellan Oscillator
• When 19-day AD line starts to advance (Point C) - McClellan
Oscillator starts to advance in this case also - we understand
that we have short-term decline number of the declining
stocks
• When 19-day AD line crosses above 39-day AD line (Point D)
- McClellan Oscillators crosses above zero line in this case -
we consider that drop in the number of the declining stock
is strong enough to consider it as a predictive signals of a
reversal up in the NYSE index trend.

18. McClellan Ratio Adjusted Oscillator
• McClellan Ratio to adjust and replace the ols
difference calculations.
• This ratio is the net of advances minus declines
divided by total of advances plus declines .
• This ratio is multiplied by 1000 to make it easier to
read.
• We optimised the possible overbought and oversold
levels and found that +4 / +2 was the best level.

19. McClellan Summation Oscillator
• McClellan Summation Index is a Breadth indicator representing
running total of the McClellan Oscillator.
• McClellan Summation Index is used to track changes in dominant
forces on the market.
• The McClellan Summation Index was developed by Sherman and
Marian McClellan and is a market breadth indicator that is based on
the McClellan Oscillator which are based on the advance/decline
data.
• The McClellan Summation Index is calculated as a running total of
the McClellan Oscillator values and it is used in technical analysis to
track bullish and bearish trends and generate trading signals.

20. McClellan Summation Oscillator
McClellan Summation Index
Formula and Calculations
In similar to Advance-Decline
Line way, the McClellan
Summation Index (MSI) is
calculated as a running total of
the McClellan Oscillator
values:
MSI = Previous MSI's Value +
Current McClellan Oscillator
Value

21. Plurality Index
• The plurality index is a market breadth indicator based on the
number of advancing and declining issues.
• The plurality index is always positive because it is based on the sum
of the absolute values of the difference between the number of
advancing and declining issues of the New York Stock Exchange.
• That sum is calculated for the previous 25 bars.
• The plurality index was developed by Paul L. Dysart.
• An indicator of market enthusiasm, the 25-day plurality index is
calculated by taking the day's total number of advancing securities
on any given exchange and subtracting the declining securities.

22. Absolute Breadth Index
• Absolute Breadth Index is an indicator based on the Breadth data
and calculated as an absolute difference between Advances and
Declines.
• Volatility assessment via ABI (Absolute Breadth Index) is considered
as non standard way to measure volatility.
• The Absolute Breadth Index ignores the direction in which prices are
going.
• ABI, volatility is measured by assessing the difference between the
number of advancing and number of declining stocks within an
index, stock market exchange or a portfolio.

23. Absolute Breadth Index
• The absolute breadth index is a measure of internal volatility. It
calculates the absolute value of the difference between the number
of advancing and declining stocks, making it a slight variation on the
A/D spread.
• The formula for ABI looks like this:
ABI = Absolute Value of [ (Number of Advancing Stocks) - (Number
of Declining Stocks) ]

24. Absolute Breadth Index
• If the ABI index readings
have low values, this
indicates that no changes
are taking place. It shows
only market activity.
• If large ABI numbers suggest
that volatility is increasing,
which is likely to cause
significant changes in stock
prices during the coming
weeks.

25. Unchanged Issue Index
•The Unchanged Issue Index uses a ratio of the number
of unchanged stocks to the total traded .
• During the high directional activity , the number of
unchanged declines.
• With the decimalization of stock quotes the ratio now
appear to be almost no predictive power .

26. Breadth Indicators
Advance
Decline Ratio
Breadth Thrust

27. Advance Decline Ratios
• Advance Decline Ratio is a Breadth indicators calculated as a
ratio between Advances (stocks trending up) and Declines
(stocks trending down).
• Technical analysis uses it to see where the majority of stocks are
trending to evaluate possible future market trend.
• The AD issues ratio oscillates around 1 (one) and it is applied as
follows:
• Values higher than 1 show that more issues are presently
advancing than declining;
• Values between 0 and 1 indicate that more issues are currently
declining in price.

28. Advance Decline Ratios
• When analyzing Market Breadth, technical analyst looks at
the level of the Advance-Decline Ratio readings and its
direction - whether AD Ratio readings are declining or
advancing.
•Positive Advance Decline Ratio readings reveal that number
of advancing stocks exceed the number of declining stocks
and it is a sign of positive Market Breadth and sign of bullish
market sentiment.
•advancing readings suggest strong bullish market
sentiment,
•declining suggest weakening bullish market sentiment.

29. Advance Decline Ratios
• Negative Advance Decline Ratio readings reveal that number
of declining stocks exceed the number of advancing stocks
and it is a sign of negative Market Breadth and sign of
bearish market sentiment.
•declining readings suggest strong bearish market sentiment,
•advancing readings suggest weakening bearish market
sentiment.
•Advance-Decline ration = 1 mean that number of advancing
stocks equal to the number of declining stocks which is a
neutral sentiment.

30. Advance Decline Ratios

31. Breadth Thrust
•Breadth Thrust is a technical indicator evaluating
proportion of the advancing stocks from the total
number of the listed stocks.
•The Breadth Thrust allows to see whether advancing
or declining stocks dominate the market.
•The Breadth Thrust indicator was developed by Dr.
Martin Zweig and is considered to be a market
momentum indicator.

32. Breadth Thrust
•Traditionally the Breadth Thrust is calculated by
dividing a 10-day exponential moving average of the
number of advancing issues by the total number of
advancing and declining issues.
•Breadth thrust is an internal indicator that is
somewhat more complicated than the
Advance/Decline Ratio.
•It is a ratio of moving averages that provides an
excellent indication of market momentum.

33. Breadth Thrust
Since the denominator of this
ratio is the sum of both
advancing stocks and
declining stocks, the ratio
cannot be greater than 1 or
less than 0.
The breadth thrust indicator,
therefore, is a percentage
value that moves like a
traditional oscillator from 1 to
100 (or .01 to 1.00).