Follow Intraday Market Breadth
Market breadth is a valuable tool for assessing intraday market direction. Market breadth (TradeStation Symbol: $ADD) measures the difference between NYSE advancing issues and declining issues. If there are more advancers than decliners, the breadth will have a positive number. If there are more decliners than advancers, then breath will be negative
Market breadth gauges the degree of market participation and can be used as a confirming indicator when following price. The trend of breadth is more important than the absolute value.
If the market is advancing on strong positive breadth (ex: +1,000), then the advance has broad market participation which suggests the advance can continue. If the market is advancing on weak breadth (ex: -500), then the advance does not have broad participation and the advance is more likely to struggle and be short-lived.
In the chart below, market breadth is charted on a 5-minute chart of the Emini S&P on 26 March 2014. The Emini S&P (Symbol: ES) is a commonly traded index future that is also a proxy for the general market.
The market opened up and the breadth was +1,600, which is very strong. But the market set a bull trap, and price began to drift down off the open. At the same time, market breadth began to decline rapidly, and by 11:00 a.m., the market breadth was at zero. The market breadth did not support a trend up off the open, and price drifted down.
When market breadth went negative, price started to decline rapidly. The market tried to rebound in the afternoon, retracing to the 20 EMA (red line). But with negative breadth, the rebound had little chance of reversing the downtrend, so price continued down.
Market breadth ended the day a -900; this was a 2,500 point negative swing in the breadth value, a strong statement about how market participants headed for the exit doors. Breadth should be correlated with other market internals, but it is a valuable addition to a trader's toolbox.
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