Market Insights

Renewed coronavirus fears hammered stocks on Friday. But even before the selloff, key market internals were weakening.

Technical analysts often study breadth, the aggregate behavior of stocks within key indexes. This can help assess the strength of a broader move. Is it the result of a few major companies rallying, or is there wide participation by most companies?

Analysts try to answer these questions by looking at tools including:

• The Advance / Decline Line
• Stocks above moving averages
• Stocks making new highs and new lows

Below we’ll consider these measures, using tools provided in our July webinar. Free custom tools used in the session are available for download here.

Market Breadth: Advance Decline Line

The Advance / Decline (A/D) line compares the total number of rising stocks to the total number of declining stocks as a running net total. An ascending line signifies that more companies are going up, while a falling line means the opposite.

The actual value of the A/D line is meaningless because it varies based on when the data set begins. What matters is its behavior relative to an index like the S&P 500. If it rises along with the broader index, the A/D line is confirming the rally. But if the line is falling as the S&P 500 is hitting new highs, it would cast doubt on the advance.

Notice on the chart above how the A/D line turned lower on November 17, even as the broader market remained strong. Also notice how the A/D line showed weakening breadth before the pullbacks in mid-June and mid-July.

Stocks Above Moving Averages

Analysts can also measure breadth by comparing the number of stocks above or below certain moving averages. The blue line on shows how many members of the S&P 500 were above their 20-day moving average each session. Notice how this total steadily fell in November. The red line shows the total above their 50-day moving averages, which peaked two weeks ago.

New Highs vs New Lows

A third technique for analyzing breadth compares the number of stocks hitting new 52-week highs and new 52-week lows.

This measure shows that 23 members of the S&P 500 hit new lows Friday. That was the most since March 23, 2020, the bottom of last year’s coronavirus crash. There were also the fewest new highs (just seven) since October 6.

This measure was especially prescient for the Russell 2000 small-cap index. Notice how its count of new lows began climbing steadily around November 15, followed by a sharp selloff at the end of last week.

In conclusion, market breadth is an advanced form of technical analysis. It lets stock traders look beyond the simple price action of indexes like the S&P 500, Nasdaq-100 and Russell 2000 to judge the strength of their advances or declines. While breadth analysis requires lengthy calculations, TradeStation makes them accessible to all customers. Hopefully this real-world example helps you apply these principles using our award-winning platform.