Breadth Analysis 101

Breadth analysis is one of the key components when we try to learn or understand market breadth. This analysis focuses on the constituents or internals of market rather than its price.

The purpose of breadth analysis is to confirm the price not just in short term but also mid to long term analysis. These tools have been used widely by institutions and investors to gauge the overall market, not just the sentiment, as well as to confirm the current market. To calculate breadth indicators we usually categorize them into four different types.

The four types of breadth

1. Differences
2. Ratios
3. Percentage

4. Cumulative

5. Differences. When I say differences it usually measures the net effect in the market. Say, for example, we take one of the most famous breadth indicators: advance-minus-decline. This is calculating the net effect of advancing stocks versus declining stocks and whichever leads conforms or diverges to the current price structure.

Let’s say, for example, in the entire NSE universe, 500 stocks are advancing, 300 are declining, and the difference is +200.

2 - Ratios. When I say ratio we have been using ratio charts for a long time, like Nifty 50 divided by Nifty 500. We are trying to understand what Nifty 50’s relative strength is as compared to the broader market (Nifty 500). But we use the same relationship to understand leading or lagging. Say, for example, we just calculated the advance-decline. How about advance/decline, ? This gives a ratio. The higher the advance is, the higher this reading is and the higher the confirmation that the market is up or vice versa .

Say, out of the same NSE universe, if 500 stocks are advancing and 300 stocks are declining, your ratio becomes 1.67. There are approximately 1.67 advancing stocks for every declining stock.

3 - Percentage - now to normalize this all reading, we can convert the entire calculation into percentages so it becomes bounded between 0 and 100. Within the same examples, say 500 stocks / 800 × 100 = 62.5%, which means 62.5% of the entire universe is advancing.

4 - Cumulative - cumulative calculation is when we want to understand the market in terms of trend and not an oscillator which is bounded. This is where your breadth becomes a trend indicator. As in, for example, we take advance, decline, and their differences over the last 10 days and see the cumulative effect of these advances or declines. Say for example, last 5 days advances have been higher than declines and the net difference is added over the last 5 days. This is a cumulative breadth indicator.

Worked examples

A. Difference

Advancing stocks − Declining stocks

Example:

500 advancing 300 declining

Difference = +200

Very intuitive, but it depends heavily on how many stocks are in the universe.

B. Ratio

Advancing ÷ Declining

Example:

500 advancing 300 declining

Ratio = 1.67

So there are approximately 1.67 advancing stocks for every declining stock.

This is scale-independent.

C. Percentage

This is often the easiest for interpretation.

Advancing ÷ Total Stocks × 100

500 advancing out of 800:

500 / 800 × 100 = 62.5%

Now you immediately know that nearly two-thirds of the universe is participating on the upside.

D. Cumulative

This is where breadth becomes a trend indicator.

Suppose your daily breadth difference is:

Day	Advances	Declines	Difference	Cumulative
1	600	400	+200	200
2	550	450	+100	300
3	450	550	-100	200
4	700	300	+400	600
5	650	350	+300	900

The cumulative breadth keeps adding the daily difference.

This is the basic idea behind a Breadth Thrust / Advance-Decline type cumulative series.

This is all for now. We now focus on the variables in our next blog.

Thank you,

Lovelesh Sharma CMT, CFTe IndexBreadth