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When we’re analyzing market action, specific charts, and/or trader behavior, we pay close attention to the king and queen of indicators: price action and volume. Tracking breadth indicators is also important, as it can help you determine if sentiment is leaning bullish or bearish.

Price and volume are technical indicators like breadth, but they don’t show us which way the market or stock is headed. They simply tell us where price is landing and how many shares are being bought or sold.

Breadth is calculated by taking the number of advancing issues on an exchange, dividing it by the total number of issues (advancing and declining), and generating a 10-day moving average of this percentage.

Why tracking breadth indicators is so important

The more advancers over decliners, the stronger the bullish argument. The more decliners over advancers, the stronger the bearish argument. We can use breadth to justify a move up in price or find divergences that get out in front of a directional change before it happens. That is golden right there, if you are able to get in front of a move and be correct more often than not. Breadth provides you with that ability, but it can also lead you astray or make you late with your assumptions.

We can have very strong breadth days with poor price action, but that won’t last for too long. This divergence will eventually correct as the indicators align (both strong or both poor). When the indicators are in alignment, we can really feel confident that a trend is in place AND can last a bit longer.

One thing to remember as a trader: you’re probably going to be a little late to a trend, and that’s quite okay. If you’re always in front of a trend, it means you are guessing and maybe trying to time the markets. That can be dangerous. If you’re using breadth as a signal, it can be late or even wrong at times. You don’t need to nail the timing, just the price.

The breadth indicators that I use regularly include the McClellan Oscillator, Chaikin Oscillator, Arms Index and Accumulation/Distribution Index. Theseindicators will tell you how strong or weak breadth is in the markets, allowing you to make an assessment as part of your decision-making process.

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