Analyzing Market Breadth: Kickin’ It With Old-School Indicators

When the stock markets make strong moves, investors and traders tend to form their own opinions about market direction. But what you see isn’t necessarily what you get. It may be a good idea to “look under the hood” and see what’s really going on beneath those price bars.

For the moment, let’s set aside some of the old-school technical indicators like moving averages, stochastic oscillators, the Relative Strength Index (RSI), and so on. You still need them, but for now, remember that there’s more to market activity than price. For example, when price is moving up, are the underlying market internals supporting that move?

In this article, we’ll discuss three market internal indicators: NYSE advances versus declines, the advance/decline line, and stocks trading above their 50-, 100-, and 200-day moving averages (MAs).

Understanding Market Breadth: NYSE Advances vs. Declines

The term market breadth has to do with the relationship between up volume and down volume. The NYSE advances vs. declines indicator compares the volume flowing into advancing stocks to the volume flowing into declining stocks. It looks at the ratio of advances to declines. If the ratio is close to 0 or 1:1, it means the market is pretty balanced—stocks moving up and down have the same amount of trading volume. More up volume would mean the ratio would be higher, whereas more down volume would push the ratio lower.

There are different ways to plot this indicator. Some traders like to check the NYSE advances vs. declines on an intraday basis and compare the ratio to its related index. Others prefer to look at it on a daily chart. Keep in mind that you could also look at advances vs. declines for other exchanges, such as the NASDAQ or AMEX. For example, if you like trading or investing in technology stocks, you may be better off watching the advances vs. declines in the NASDAQ versus the NYSE. 

All these different plotting choices are available on the thinkorswim® platform. You can start by entering $ADVN-$DECN in the symbol box. This brings up a chart displaying the ratio either as bars or lines above and below a horizontal zero line. It can look chaotic, but it does give you a visual representation of whether there’s more up volume or down volume at any given time.

You can also plot advances versus declines as a subchart using the Price Ratio study. Pull up a chart of the S&P 500 Index (SPX) and select Studies (the beaker icon) > Add Study > All Studies > P-R > PriceRatio. You’ll have to customize the input parameters by selecting the indicator and changing the two symbols to $ADVN and $DECN. This will plot a subchart similar to what you see in figure 1. PriceRatio also plots the moving average (there’s no avoiding them) to use as a relative measure. 

You can see in figure 1 that leading up to the February high in SPX, the NYSE advances vs. declines ratio was relatively balanced. Since then there have been quite a few spikes, reflecting the volatile nature of the markets. The yellow line represents the 10-day simple moving average of the ratio.

How do you use the NYSE advances vs. declines in your trading or investing decisions? Let’s look at the trading activity on March 23, which marked the low reached after the pandemic hit. At the close of that day, the NYSE advances vs. declines ratio was below average and not showing much of an increase in declines. The same was true the day before. This could’ve been an indication that perhaps the selling was slowing down. The day after that March 23 low, SPX moved up and there was a spike in the NYSE advances vs. declines.

Those who were waiting to jump into long positions may have taken this as a buy signal. Such signals should prompt you to pull up a chart of a symbol you’re considering trading, plug in some of those old-school indicators to confirm the trending action, and look for entry signals.

In a nutshell, you’re looking for confirmations or divergences between price action and the breadth. If the market moves up and the advances vs. declines ratio rises, it’s a pretty strong signal the trend will continue. But if the market moves up and the ratio falls, it may be a sign the trend is slowing down.

Advance/Decline (A/D) Line

The advance/decline (A/D) line gives you an idea of what the masses are doing when a market is rallying or slumping. Basically, it’s a line chart based on a simple calculation: the total number of stocks that closed higher minus the number of stocks that closed lower on a given trading day. The A/D line is either positive or negative depending on whether more stocks advanced or declined.

To see the A/D line on thinkorswim, pull up a chart. Go to Studies > Add Study > All Studies > AdvanceDecline. Once the indicator is displayed on the subchart, you can select it, choose Edit Study AdvanceDecline, and pick the type of analysis you want to display from the menu. In figure 2, we used a chart of the Nasdaq Composite Index (COMP) and plotted the advance/decline line to display the ratio of advances to the overall number of stocks for COMP. 

The A/D line moves above and below a horizontal line at zero. When the A/D line is rising, it may indicate a rally is likely to continue. If it’s falling, it may indicate a decline is likely to continue.

In figure 2, COMP had been advancing since March 23, and the NASDAQ A/D line was also trending up. But the indicator looked to be consolidating above the zero line. This is something to keep an eye on, especially if the index continues to move higher. If the A/D line starts moving lower while COMP moves higher, it means fewer stocks in the index are participating in the rally. If there’s a reversal in the index, it’s time to turn to your old-school indicators to make trading decisions.

Stocks Trading Above Their 50-, 100-, and 200-Day Moving Averages

One way to measure average consensus is to see if a stock is trading above or below its moving average. If an index such as the S&P 500 is bullish, it’d be nice to see most of those 500 stocks move above a specific moving average. On thinkorswim, you can find out what percentage of stocks are doing just that.

In the chart symbol box, enter $SPXA50R for the percentage of S&P 500 stocks trading above their 50-day moving average, $SPXA100R for the percentage of stocks trading above their 100-day moving average, and $SPXA200R for the percentage of stocks trading above their 200-day moving average. In figure 3, 40% of S&P 500 stocks are trading above their 200-day moving average. 

You can chart this percentage to help confirm a market trend or anticipate reversals. One way is to identify the normal range. Anytime the indicator moves outside the normal range, it suggests market extremes. On June 8, 2020, the indicator reached a high of 63%, which is when the SPX reached a post-pandemic high of 3233. When the percentage reaches an extreme level, you can look for signs of SPX reversing. 

Sharp peaks or troughs could mean a pullback, whereas shallower ones may indicate a reversal. Again, you can turn to those old-school moving averages, moving average convergence divergence (MACD), and Fibonacci retracements for confirming signals.  

Putting It All Together

On the thinkorswim platform, you can place these three indicators on the Charts tab and compare them to an appropriate index. Look for confirmations and divergences. Compare the action to the previous day. You could also look at an intraday chart and drill down on daily movement. Is the NYSE advances vs. declines volume ratio diverging from the A/D line? Are the number of stocks trading above a moving average in line with other indicators? More important, are the indicators moving higher when the broader index is rising? These are the market internals that set the foundation for making trading decisions.