What is market breadth?
Everyone wants to know where the markets are headed, right? Will the stock markets go up? Will they fall? All of our investment decisions would be easy and fruitful if we knew this. But, no one can accurately and consistently predict the movements of the stock markets. This is called “timing the markets,” which is something that investment experts advise against.
However, there are ways to arrive at an estimate of whether the markets would go up or down. Analysing market breadth is one such way. According to Investopedia, market breadth is a technical analysis technique used to gauge the direction of the overall markets.
How is market breadth calculated?
Market breadth analyses the number of companies that are advancing relative to the number of companies that are declining. Positive market breadth occurs when more stocks are on the upward trajectory. And vice versa. Furthermore, it also sees whether this movement is supported by good trading volumes or not.
When a larger number of companies within the market are doing well, it shows positive signs for the economy in general. This broad market uptrend is depicted through a positive market breadth.
The Modified Arms Index is used to calculate the market breadth. Here, the AD ratio is divided by AD volume. A low value indicates a strong market move supported by volumes.
What are AD ratio and AD volume?
AD stands for Advance-Decline.
The AD ratio is calculated by dividing the number of stocks that have gone up by the number of stocks that have decreased.
The AD volume ratio is calculated by dividing the total trading volume of the stocks that have gone up by the total trading volume of the stocks that have gone down.
What is Modified Arms Index?
The Modified Arms Index is calculated by dividing the AD ratio by the AD Volume ratio. A low value indicates a strong market move supported by volumes.
How does market breadth affect MMI?
Price movements constantly happen in the market, but when they are supported by good trading volume, that’s a signal that the particular trend is more real and likely to continue. The Modified Arms Index measures that, thus reinforcing the strength of the market direction as predicted by other MMI indicators.