There are numerous breadth indicators. These technical indicators show the market internals or how the market of stocks is doing instead of relying exclusively on just the market price itself. Breadth indicators are important because it provides information about a market move before it happens. The divergences between the technical indicator and the market price can warn of an impending trend change in price. Some of the more popular market breadth indicators are Tick Charts, McClellan Oscillator, Cumulative Advance-Decline Line, A-D Volume Line, % of Stocks Trading above a Moving Average, etc.
The granddaddy of the market breadth indicators remains the Advance-Decline (A-D) Line. The A-D Line indicator tracks the cumulative daily advances minus declines for key market indexes such as S&P 500 Index, NDX 100, etc. Based on the formula for the A-D Line, a stock will register as an advance or decline with a change as small as one cent, and it will be equally weighted against a stock that changes by $1 or $10. Some believe this skews the breadth readings and is not a true reflection of the market internals.
A-D Volume Line uses the same formula as the A-D Price Line. However, its strength is that it is based on the amount of the day's volume. Because of this, the A-D Volume Line is more accurate in showing broad or narrowed market participation as you typically need volume to expand into rallies and decline into corrections.
Two other less popular breadth indicators - the Silver Cross Index (SCI) and the Golden Cross Index (GCI) can help confirm market internals. SCI shows the percentage of stocks with the 20-day EMA trading above the 50-day EMA. The Silver Cross-Buys denote intermediate-term buy signals. GCI is a derivative of the famous golden cross strategy, which shows the percentages of stocks with the 50-day EMA crossing above the 200-day EMA, suggesting a long-term buy signal.
When the 20EMA is trading above the 50EMA, it denotes the stock has been persistently bullish over the intermediate-term time horizon. The same is true when the 50EMA is trading above the 200EMA, implying the stock is in a solid and persistent long-term uptrend. When the SCI or the GCI declines, it warns that a negative 20/50EMA and 50/200EMA crossovers are developing, implying market participation is fading. If the divergence continues, the result is that any market advance is questionable and may soon end. The Silver Cross and Golden Cross Indexes can give a more accurate accounting of market breadth reading for intermediate-to-longer term investors.
Attached are five charts – SPX line chart dating back to late-2019, SPX A-D line, SPX A-D Volume line, Silver Cross Index, and Golden Cross Index.
Since May 2021, some divergences are developing in the four (4) market breadth indicators to suggest traders and near-term investors need to pay closer attention to the market actions over the next few days to few weeks.
The SPX A-D line remains healthy as it continues with its primary uptrend. In the process, it has also recorded new all-time highs, confirming the new SPX price highs. Since the SPX A-D line and SPX Index are trading in sympathy with one another, there is no visible divergence. Technical Interpretation: Bullish
The Golden Cross Index (GCI) is currently trading at 90.20%, declining slightly from its late-Apr/early-May 2021 high of 96%. The current reading suggests most SPX stocks have golden cross buy signals as the 50EMA are trading above their 200EMA. It implies the SPX is healthy as many of the SPX stocks are in bullish uptrends, at least from a longer-term perspective. Nonetheless, breadth readings at the 90%-plus level also warn of an overbought market condition that requires consolidation. It can also indicate the best part of the bull rally may be behind us. Technical Interpretation: Bullish Long-term
The SPX A-D Volume line has been trading sideways over the past four months, suggesting the volume breadth readings are neutral and not supportive of the recent SPX rally to new all-time highs. The lower volume breadth expansion could also be from the lack of liquidity and activity during the summer doldrums. Nonetheless, a potential head/shoulders bottom pattern may be developing in the SPX A-D Volume line. A convincing breakout above the neckline resistance can trigger the expansion of the SPX volume breadth trend. Technical Interpretation: Neutral
The Silver Cross Index (SCI) has been dropping steadily. If the trend persists, then this can be a negative technical development. SCI has declined from 95% at the peak in late-Apr 2021 to a recent low of 56%, while SPX has recorded new all-time highs. With a current reading of 66.4% (mid-Jul 2021), the negative divergence suggests the larger-cap stocks in SPX (i.e., AAPL, MSFT, GOOGL, FB, etc.) may be doing the heavy lifting since there are fewer Silver Cross-buy signals. Traders and intermediate-term investors need to monitor the rebound closely as further negative divergence may signal near-term market weakness. Technical Interpretation: Bearish Near-term
The above mixed technical signals from the four market breadth indicators are not necessarily implying an impending market top. When the Golden Cross Index (GCI) is rising, it often signals a sustainable SPX uptrend, longer-term. However, continued divergences in the volume indicator and the Silver Cross Index (SCI) suggest market participation may be fading near-term. When the SCI steadily declines, it warns of negative 20/50 EMA crossovers. If the above trends continue, the result is that any market advance is at risk for a consolidation, correction, or worse, the start of a trend reversal.