2025.11.07 2025.11.07
What Is Market Breadth and How Investors Use It?

Oleg Tkachenkohttps://www.litefinance.org/blog/authors/oleg-tkachenko/

Market breadth indicators are auxiliary tools for analyzing the stock market. They provide a better insight into market movements. If an index is rising, it does not necessarily mean that the overall market is strong, as the move may be driven by only a few large-cap stocks.

Market breadth indicators show how many stocks in an index are advancing or declining, and how they correlate with one another and with the index as a whole. This overview will be particularly useful for those who work with stock assets using long-term strategies.

Major Takeaways

• Market breadth refers to a set of indicators that evaluate market health or individual stock indices by analyzing the number of rising and falling stocks compared to the previous period. These indicators are designed for the stock market.
• A broad market is one in which most stocks move consistently in the same direction. The broad market strength serves as the driving force behind overall market trends. A narrow market, on the other hand, is characterized by only a few stocks changing in price, resulting in a weak and unstable trend.
• When most stocks rise in the index, it indicates optimistic market sentiment and confirms the overall trend. When the index increases solely due to a few individual securities, the trend is considered weak.
• The formulas for calculating indicators may take into account the absolute and relative change in the number of growing and declining securities, either in relation to each other or to the total number of stocks in the index. Some indicators factor in trading volumes.
• Market breadth indicators have certain limitations, as they do not reflect the magnitude of price movements and tend to be less effective over short periods or during sideways markets.

What Are Market Breadth Indicators?

What is market breadth in trading? It is a set of technical indicators that measure how many stocks within a given stock index or across the market spur its movement. The term “number of stocks” refers to the number of companies, not to be confused with trading volume. Examples of market breadth indicators include:

• The ratio of the number of rising stocks to the number of falling stocks.
• The ratio of advancing/declining stocks to their total number.

These indicators help assess the overall state of the market, including its direction, trend stability, and other characteristics. Instead of analyzing the price of a stock index itself (such as the S&P 500), they focus on the behavior and tendencies of individual securities.

For example, the S&P 500 index tracks the 500 biggest US companies by market capitalization. The largest companies carry the most influence. When S&P 500 futures are climbing, it can look like sentiment across the US market is bullish, and the rally will continue. However, that is not always the case. To gauge actual market strength, traders turn to market breadth indicators.

Possible scenarios:

• The 50 smallest companies in the index have decreased, while the five largest by market capitalization have gained. Because those heavyweights have a much bigger influence than the laggards, the S&P 500 index keeps rising. That points to a shaky rally held up by a few market giants.
• Of the companies in the index, 400 have soared, 80 have plunged, and 20 have shown moderate volatility. With most stocks climbing, the index’s upward trend is robust.

When the majority of stocks are going up, it is a sign of a healthy market with moderate and predictable volatility. If most stocks are plummeting while a few big companies are driving the market higher, the market cannot be considered healthy.

What Is the Breadth Ratio?

The Breadth Ratio shows the ratio of rising to falling stocks:

• Positive market breadth (K > 1) occurs when the number of increasing stocks exceeds the number of decreasing ones. This ratio may indicate that investors expect further growth and are buying stocks.
• Negative market breadth (K < 1) appears when decliners outnumber advancers. It indicates growing investor caution and selling activity that reinforces the bearish momentum of the entire market or index.

The market breadth ratio and similar indicators can be used to calculate the Fear and Greed Index, a gauge of how eager investors are to buy or, conversely, sell assets. Rallying stocks signal greed, while sliding ones indicate fear.

The Purpose of Market Breadth Indicators

Traders use market breadth indicators for the following purposes:

• To confirm the trend. The indicators reveal the overall trend, confirming its strength or weakness.
• To spot potential reversal zones. When the indicator reaches its extreme readings or overbought/oversold zones, it may warn traders of an imminent price reversal.
• To find entry points. For example, market breadth indicators track how many stocks trade above or below the long-term moving average to gauge market momentum.
• To assess market momentum and volatility. Market breadth indicators that factor in trading volumes can show how actively money is flowing into or out of the market. High indicator values may indicate increased volatility.
• To evaluate risks. When market breadth is narrow, the index or market rises mainly because of a few giant companies. This situation increases the risk of sharp pullbacks. Market breadth indicators help spot these risks early so investors can adjust their portfolios.

Market breadth indicators are mainly applied in the stock market.

Types of Market Breadth Indicators

Each indicator has its own calculation method. Some measure ratios or percentages, while others focus on price changes. There are also indicators that factor in trading volume. Testing indicators on historical data using out-of-sample methods helps identify which ones perform best.

Advance-Decline Line

The Advance–Decline (A/D) Line is a classic market breadth indicator that reflects the balance between advancing and declining stocks. It shows whether the majority of securities support the current market direction or whether the market or index is driven by a few leading companies. A rising A/D line confirms the strength of the trend, while a divergence with the index movement may signal a weakening trend.

Calculation formula:

where:

• Adv(n)​ – number of stocks that closed higher than their previous day’s close.
• Dec(n) – number of stocks that closed lower than their previous day’s close.

Advantages of the ADL indicator:

• The indicator measures how many stocks are trading in line with the major market index or the overall market. It reflects how strong or weak the current trend is.
• It is a leading indicator. Divergence between the ADL and the index price can provide early warning signs of a trend reversal before the asset price begins to form clear signals.

Disadvantages of the ADL indicator:

• The index value is independent of trading volumes or the magnitude of price movements. It reflects only the number of stocks in a rally or dip.
• During a sideways movement, small price swings generate false signals that obscure the real trend.

In general, the indicator is used to analyze the stock market and stock indices.

S&P 500 200-Day Index

The 200-day moving average of the S&P 500 index gauges the average closing price over the last 200 trading days. A price above the 200-day MA signals a bull market, while a price below the line signals a bear market.

The indicator is calculated as the arithmetic mean of closing prices over the last 200 daily candlesticks.

The period can be adjusted depending on the strategy and trading objectives. For example, it can be reduced to 150 candlesticks. The parameter is selected in the strategy tester.

Red arrows mark valid signals generated by the 200-day moving average, while blue arrows show false signals.

Advantages of the indicator:

• The indicator relatively accurately determines the long-term trend. It smooths out short-term fluctuations and allows you to see the main direction of price movement.
• It is easy to interpret. If the price is above the moving average and keeps climbing, the uptrend is intact. But the further it moves away, the greater the chance of a pullback.

Disadvantages of the indicator:

• The indicator is only suitable for assessing long-term trends.
• It is a lagging indicator. The 200-day period makes it a slow MA, meaning that short-term price changes over the past two to four days have little effect on its value. As a result, traders may miss a significant part of the trend.

The SMA(200) indicator is available on any trading platform.

On-Balance Volume

On-Balance Volume (OBV) is a cumulative volume index that relates price movement to trading volume. It is based on the idea that volume often precedes price action. When volume increases without a corresponding price change, it may signal that large investors are accumulating positions, and the price may change sharply in the near future.

Calculation formula:

where:

• Vn – current trading volume.
• Cn​ and C(n−1) – current and previous closing prices.

Advantages of the OBV indicator:

• It is a leading indicator. Divergence between OBV and price signals an imminent trend reversal.
• Takes into account changes in trading volumes.
• Determines market sentiment.

Disadvantages of the OBV indicator:

• The indicator is more suitable for stock markets. On Forex, it may give misleading signals. Stock brokers use actual trading volumes from exchanges, while Forex relies on tick volumes.
• During consolidation periods with low trading volume, the indicator may show false signals, such as fake breakouts.
• The indicator treats all price changes equally, regardless of whether the move is 10 or 20 points.

On-Balance Volume is a built-in indicator found on most trading platforms, such as MT4 and MT5.

Example of Market Breadth Analysis in Action

Let’s explore some historical examples:

• The dot-com bubble in 1998-2000. From late 1998 through March 2000, the S&P 500’s rally was mainly bolstered by a few technology stocks. In 1999, the top 15 companies in the index accounted for roughly 70% of the index’s total gains, while most other stocks changed little. During this period, the A/D Line showed a negative divergence, a warning sign that preceded the index’s subsequent decline.
• In 2023, just 1.4% of S&P 500 stocks accounted for 62.2% of the index’s gains, while the remaining 98.6% contributed only 37.8%. This concentration raised concerns about market imbalance and led investors to consider a more diversified approach, focusing on undervalued stocks with solid growth potential.

Practical example:

The OBV indicator was applied to the daily S&P 500 chart. The index was trading sideways with a slight upward bias, while OBV was gradually declining. This created a bearish divergence, signaling a potential reversal in the direction of the indicator. Soon after, the price started to fall.

Limitations of Market Breadth Indicators

Market breadth indicators have the following limitations:

• Most indicators fail to reflect the actual strength behind price swings. For instance, if 400 out of 500 S&P 500 stocks each rise by only 0.001% for three consecutive days, many indicators would still signal an upward trend, even though, in reality, market momentum remains flat.
• A deeper analysis is needed. For example, investors may sell shares of Company A from the energy sector and buy shares of Company B in the pharmaceutical sector. Both companies are part of the S&P 500 index. As Company A’s price falls and Company B’s rises, most indicators show balance, masking the start of a real uptrend in the pharmaceutical sector.
• Market breadth indicators are less accurate on lower time frames. Therefore, they are not suitable for scalping or intraday trading.

There are no ideal or universal indicators. Each tool must be selected according to the market situation and the asset.

How Is Market Breadth Used by Investors?

Market breadth indicators help identify:

• The strength and stability of the trend. If the number of new highs exceeds the number of new lows, the index is above the long-term moving average, and the MA is rising, the trend is potentially strong.
• The number of stocks contributing to the rise or decline of the index. The fewer stocks, the weaker the trend.
• Movement of capital between sectors, such as investors shifting funds from other industries into technology stocks during the peak of the AI boom.
• Divergences. Market breadth indicators are leading indicators. If there is a divergence between the indicator and the price, an asset may soon reverse in the direction of the indicator.

These indicators aim to uncover market tendencies that may not be obvious and highlight the individual stocks driving the entire index.

Is Market Breadth a Good Indicator?

There are no good or bad indicators. There are unfavorable settings, incorrect combinations with other technical indicators, incorrect signal interpretations, and indicator formulas that do not align with current market conditions.

Market breadth can act as both a leading and a lagging indicator. On daily and higher time frames, it often serves as a leading indicator, confirming the strength or weakness of a trend before a sustained move begins. On intraday charts, however, market breadth tends to react to even minor short-term fluctuations. Since it does not consider the magnitude of price changes, it can respond to market noise.

Thus, market breadth indicators work best on D1 intervals, provided there are signals confirming the trend.

What Is the Difference Between Market Breadth and Depth?

Market Breadth and Depth have the following differences:

• Market breadth indicates how many stocks influence a given index or stock exchange. In a broad market, a large number of stocks contribute to the price movement. In other words, the index goes up because most stocks are appreciating.
• Market depth shows the number of buy and sell orders placed at different price levels for a given asset. It reflects the market’s liquidity, or how easily trades can be made without causing large price movements. A deep market has many orders across nearby price levels, leading to a narrow spread and high liquidity.

Conclusion

Market breadth indicators are auxiliary tools for traders:

• These indicators are utilized in long-term strategies to confirm the trend.
• They are ineffective during flat markets or on lower time frames.
• They can be combined with trend indicators, oscillators, and volume indicators.
• They are mostly leading indicators. An indicator’s divergence serves as a strong signal.
• If the market breadth ratio shows that the index is pushed up by just a few powerful stocks (the index is rising while the ratio is below 1), it is a signal to avoid buying index futures and instead look into why those leading stocks are surging.
• Before using a market breadth indicator, you need to understand its formula and the data it uses, such as trading volumes or the ratios it measures. This knowledge is essential for interpreting its signals.

Any combination of indicators should be tested first, using historical data covering at least 200–300 trades or a period of 3–5 years, before being applied in live trading.