Mastering the Stock Market: High Probability Market Timing and Stock Selection Tools

CHAPTER 5

Breadth Studies

This chapter is dedicated to explaining indicators that measure what is referred to as the breadth of the market. Namely, we will look at the measurement of advancing shares versus declining shares of a stock index. There are several indicators that we can use; I will focus on the most useful indicators and more aptly how to apply them in your market analysis. What I am attempting to do here with market data using breath indicators is simply gathering and organizing facts about the market.

Market breadth indicators will not give indications on a single stock but rather the market as a whole. And if the overall market is experiencing an undertone of strength or weakness, then it most likely will have an effect on individual stocks that are correlated in price movement based on the company's capitalized weighting to the overall stock index. Therefore, it's imperative to look at the health of the overall market before you select an entry or an exit on individual stock.

When it comes right down to it, there are many indicators out there that have been created with only six pieces of information: the number of advancing versus declining issues, the number of new 52-week highs and new 52-week lows, and the amount of volume on the advancing versus declining stocks.

Many of the pioneers in this field who deserve credit include Sherman McClellan, who created the McClellan Oscillator and Summation Index; Joe Granville, who is credited with structuring the on-balance ...