One of the most important market breadth indicators is the cumulative advance minus decline line. It is based on the net number of advancing stocks minus the number of declining stocks. This breadth indicator measures the health of the market in question and most important, the sustainability of the existing or primary trend.
Historically, bullish (positive) or bearish (negative) divergences in the breadth indicators as compared to its price trends can signal a change in the supply/demand equilibrium of the specific market. Note the shape and the direction of the Advance-Decline (A-D) line are more important than the actual value. We will again review five major US stock market indexes including S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), NYSE Composite Index (NYA), NASDAQ Composite Index (COMPQ), and NASDAQ 100 Index (NDX). We will also evaluate three key market breadth indicators – advance minus decline price line, advance minus decline volume line, and the percentage of stocks trading above its 200-day moving average.
When the price of a market index trades to new highs including record highs it is preferable to also witness the A-D line trend higher to new highs/record highs. In addition, it is favorable to also see the A-D volume line also confirm new highs/record highs. Although the percentage of stocks trading above its 200-day moving average is not a true market breadth indicator, we have found this indicator to be reliable in gauging the internal health of the market in question. It is better for an index to have more stocks that are currently trading above their respective 200-day moving averages, at least from an intermediate-term to longer-term perspective.
When a major market index is breaking out to new all-time price highs it is ideal to also see the three breadth indicators breakout as well. On the other hand, if an index trades to new all-time price highs but the A-D price line or the A-D volume or % of stocks trading above its 200-day moving average are not confirming this move then it may signal that more time is needed or it may indicate investors are stock selective in this market.
As you can see from the enclosed charts most of these indexes have already confirmed market breadth breakouts to support the price breakouts to all-time highs. It appears the NASDAQ Composite Index (COMPQ) still needs further work to confirm its price and breadth breakouts.