Blog: Market Analysis

Market breadth indicators analyze the number of stocks advancing relative to those declining in a given index or stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq.

Positive market breadth occurs when more stocks are advancing than declining, suggesting that bulls are controlling the market’s momentum and confirming a price rise in the index.

Conversely, a greater number of declining securities confirms bearish momentum and a potential downside move in the stock index.

Understanding Market Breadth

Market breadth refers to how many stocks are participating in a given move within an index or stock exchange. For example, an index may be rising, but more than half of its stocks could be falling. This occurs when a small number of stocks with large gains push the index higher. Market breadth indicators can reveal this, providing traders insight into the true performance of the overall market, even when a rising index suggests otherwise.

Breadth indicators attempt to measure the underlying strength or weakness in an index. This information helps technical traders gain insight into the potential future moves of an index.

A large number of advancing stocks is a sign of bullish market sentiment and helps confirm a market uptrend. On the other hand, a large number of declining stocks signals bearish sentiment and suggests a downtrend.

Market Breadth Indicators and Uses

There are various market breadth indicators, each calculated differently to provide slightly different information. Some focus on the number of advancing or declining stocks, while others compare stock prices to benchmarks, and some incorporate volume. The main goal for most market breadth indicators is to confirm or warn of divergence between the indicator and the overall index.

Divergence occurs when an index moves in one direction, but the market breadth indicator moves in the opposite direction, which can signal a potential market reversal. However, market breadth indicators are generally poor for precise timing, as they may signal too early or fail to forecast a reversal.

Here are some common market breadth indicators:

Advance-Decline Index (A/D Line): This indicator calculates a running total of the difference between advancing and declining stocks. Traders watch for divergence between the A/D line and a major market index, such as the S&P 500.
New Highs-Lows Index: This compares stocks making 52-week highs to those making 52-week lows. A reading below 50% suggests more stocks are hitting lows and could signal bearish market conditions.
S&P 500 200-Day Index: This shows the percentage of S&P 500 stocks trading above their 200-day moving average, indicating broad market strength when above 50%.
Cumulative Volume Index (CVI): This measures whether volume is positive or negative by adding the volume of advancing stocks and subtracting the volume of declining stocks.
On-Balance Volume (OBV): This indicator tracks volume based on whether the index rises or falls. Up days add volume, while down days subtract volume.

Example of Market Breadth Analysis

An example of market breadth analysis is shown through the SPDR S&P 500 (SPY) ETF chart. During an S&P 500 rise, the cumulative volume index confirmed the uptrend, while the on-balance volume remained flat, signaling underlying weakness. A steep price decline followed, confirming the warning from the breadth indicator.

What Is Meant by Market Breadth?

Market breadth refers to how broadly an index’s move is supported by the underlying stocks. It measures the strength of an index’s rise or fall by examining how many stocks are participating in the movement.

What Is Market Breadth and Depth?

Market breadth studies the strength or weakness of moves within an index, while market depth refers to a market’s ability to handle large orders without significantly impacting a security’s price.

Is Market Breadth a Good Indicator?

Market breadth indicators provide useful information about market sentiment, but like all indicators, they should be confirmed with price action. Using breadth indicators alone is not recommended.

Concluding Thoughts

Market breadth refers to a set of technical indicators that evaluate price movements in a given stock index.

These indicators provide insight into whether an index’s movement is supported by the broader market.

Market breadth is used to confirm the strength of a market trend and is valuable for understanding the overall market sentiment beyond just index levels.

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Negative Volume Index (NVI)

The negative volume index (NVI) is a technical indicator that integrates volume and price to show how price movements are affected by days when trading volume is lower than the previous day.

The NVI is particularly useful in tracking “smart money” movements, typically associated with institutional investors, during low-volume trading days.

Understanding Negative Volume Index (NVI)

The NVI is often used alongside the positive volume index (PVI) to gain insights into how price is being influenced by volume trends.

Both the NVI and PVI were first developed by Paul Dysart in the 1930s and gained wider recognition in the 1970s, largely due to Norman Fosback’s book Stock Market Logic.

These indexes track price changes in relation to volume trends and are often used in technical analysis software, such as MetaStock and EquityFeedWorkstation.

The NVI helps investors follow price trends that are influenced primarily by institutional investors and other “smart money” players during low-volume days.

It provides a clearer picture of price action without the noise of high-volume market movements, which tend to be more influenced by retail traders.

NVI is particularly useful after periods of high-volume trading when the price may have been distorted by market noise.

On lower-volume days, the NVI can reveal how institutional investors are positioning themselves, offering more reliable signals for potential price movements.

NVI Calculations

The NVI only changes when the trading volume of the current day is lower than the previous day.

If today’s volume is higher than the previous day, the NVI remains the same.

When volume decreases, the NVI is calculated using the following formula:

NVIₜ = NVIₜ₋₁ + [(Pₜ − Pₜ₋₁) / Pₜ₋₁] × NVIₜ₋₁

Where:
NVIₜ = Negative Volume Index at time t
Pₜ = Price or index level at time t

Concluding Thoughts

The Negative Volume Index is a valuable tool for technical analysts seeking to track institutional trading activity during low-volume periods.

It provides a clearer view of price movements driven by “smart money” and can be a useful complement to the Positive Volume Index for a more comprehensive analysis of market trends.

By focusing on volume dips, the NVI offers insights that help traders distinguish between noise and genuine market direction.

Positive Volume Index (PVI) Indicator

The positive volume index (PVI) is an indicator used in technical analysis that provides signals for price changes based on positive increases in trading volume.

The PVI helps in assessing trend strength and potentially confirming price reversals.

It can be calculated for popular market indexes as well as used to analyze movements in individual securities.

The Formula for the Positive Volume Index (PVI)

If today’s volume is greater than yesterday’s volume, then:

PVI = PPVI + ((TCP − YCP) / YCP) × PPVI

Where:
PVI = Positive Volume Index
PPVI = Previous Positive Volume Index
TCP = Today’s Closing Price
YCP = Yesterday’s Closing Price

If today’s volume is less than or equal to yesterday’s volume, the PVI remains the same.

How to Calculate the Positive Volume Index (PVI)

If today’s volume is greater than yesterday’s, use the PVI formula.
Input today’s price data and the previous PVI calculation.
If there is no previous PVI, use today’s price as the initial PVI.
If today’s volume is not greater than yesterday’s, the PVI stays the same.

Understanding the Positive Volume Index (PVI)

The PVI is typically followed in conjunction with a negative volume index (NVI) calculation.

Together, they are known as price accumulation volume indicators. The PVI and NVI were first developed by Paul Dysart in the 1930s, gaining popularity after being included in Norman Fosback’s 1976 book Stock Market Logic.

Fosback’s research showed that when the PVI is below its one-year average, there is a 67% chance of a bear market.

If the PVI is above its one-year average, the chance of a bear market drops to 21%.

Traders use the PVI to identify trends: a rising PVI suggests bullish momentum, while a falling PVI indicates bearish trends.

The PVI becomes more volatile when trading volume rises.

Special Considerations

The PVI is based on the idea that high-volume days are driven by the crowd. When the PVI is above its one-year moving average (about 255 trading days), it signals optimism among traders, which may lead to further price increases. If the PVI falls below the one-year average, it indicates pessimism, signaling an impending or ongoing price decline.

Traders often plot a nine-period moving average (MA) of PVI and compare it to a 255-period MA. Crossovers between these lines can signal trend changes. For instance, if the PVI rises above the 255-period MA, it might indicate a new uptrend, confirmed as long as the PVI stays above the one-year average.

The PVI is not always accurate, and its signals should be interpreted with caution, especially during periods of high market volatility.

The Positive Volume Index (PVI) vs. On Balance Volume (OBV)

Both the PVI and OBV incorporate volume and price, but they calculate and interpret this data differently. The PVI focuses on whether volume increased from the previous session, while OBV sums positive and negative volume based on whether the price closed higher or lower than the previous day. As a result, the two indicators provide different trade signals and insights.

Limitations of Using the Positive Volume Index (PVI)

The PVI tracks “not-smart money,” or the crowd, which generally performs less well than professional traders. It can be prone to whipsaws, causing multiple crossovers in quick succession that make trend direction difficult to discern. The PVI can also experience anomalies, such as continuing to decline even when the price is rising.

To mitigate these issues, it is best to use the PVI alongside other technical indicators, price action analysis, and fundamental analysis, especially for longer-term trading decisions.

Concluding Thoughts

The Positive Volume Index offers insights into crowd behavior and volume-driven price changes, making it useful for confirming trends and spotting reversals. However, its limitations—such as susceptibility to false signals—mean it should not be relied on in isolation. Traders should combine the PVI with other analytical tools to make more informed decisions.

Ease of Movement Indicator

Richard Arms’ Ease of Movement (EOM or EMV) indicator is a technical study that attempts to quantify a mix of momentum and volume information into one value.

The intent is to use this value to discern whether prices are able to rise or fall with little resistance in the directional movement.

Theoretically, if prices move easily, they will continue to do so for a period of time that can be traded effectively.

Understanding the Ease of Movement Indicator

The Ease of Movement indicator, also known as the Ease of Movement Value (EMV) indicator, is an oscillator developed by Richard W. Arms, Jr. to help traders identify the “ease” of price movement.

Since it looks at both price volatility and volume, many traders find it useful when assessing the strength of a trend.

The EMV indicator involves several calculations, including a simple moving average:

Distance Moved = (High + Low) / 2 − (PH + PL) / 2

Box Ratio = Volume / (Scale × (High − Low))

1-Period EMV = (High + Low) / 2 − (PH + PL) / 2 / (Volume / (Scale × (High − Low)))

Scale equals 1,000 to 1,000,000,000 depending on the average daily volume of the stock. The more heavily traded the stock, the higher the scale should be to keep the indicator value in single or double digits.

14-Period Ease of Movement = 14-Period Simple Moving Average of 1-Period EMV

Where PH = Prior High, PL = Prior Low

When the indicator creates output values above zero and rising, this suggests that the price is increasing on low volume, while falling negative values suggest that the price is dropping on low volume.

Special Considerations

Some analysts prefer to add a moving average to the EMV line and use it as a trigger line to generate trading signals.

Traders may also look for divergences and convergences between the Ease of Movement and price as a signal of upcoming reversals.

Since the EMV line is similar to a momentum or rate-of-change indicator, it can be viewed as a volume-weighted momentum line. Comparing the EMV and Momentum indicator may provide useful information about the influence of volume on price.

Most traders use EMV in conjunction with other technical analysis tools, including technical indicators and chart patterns, to improve their chances of success.

For example, a trader may notice a bullish reversal chart pattern, see that the Ease of Movement is improving, and buy the stock after it breaks out from a specific price point.

Ease of Movement Indicator Example

The following chart shows the EMV indicator applied to the SPDR S&P 500 ETF (NYSE ARCA: SPY) in late 2017 and early 2018.

In this example, the EMV indicator appears below the price chart as an oscillator.

A trader may have noticed that the indicator wasn’t rising as quickly as the price between January and February, suggesting that the rally could be losing momentum, potentially helping generate a timely sell signal when combined with other technical analysis.

The peaks and valleys over the subsequent periods also show when the stock began to regain some of its momentum, which may be helpful when trading in choppy markets.

How to Read the Ease of Movement Indicator

The Ease of Movement indicator fluctuates around a zero-line.

When the indicator is above the line, prices are advancing with relative ease; the greater the value, the greater the ease.

Similarly, when the indicator is negative, prices are declining with relative ease depending on how negative the reading is.

What Does Ease of Movement Mean in Stocks?

Ease of movement refers to how much price change occurs per unit of trading volume. If less volume is able to move prices farther, there is greater ease of movement.

How Should the Ease of Movement Indicator Be Used?

Traders may want to enter positions when the ease of movement is high, as it could suggest buying into an ongoing rally or shorting into a selloff in progress. As with most technical indicators, the ease of movement should be used in conjunction with other tools.

Concluding Thoughts

The Ease of Movement indicator provides a valuable perspective on the relationship between price movement and volume.

While it can highlight periods of easy price movement, it’s best used with other technical analysis tools to improve trading decisions.

Accumulation/Distribution (A/D) Indicator

What Is the Accumulation/Distribution Indicator (A/D)?

The accumulation/distribution indicator (A/D) is a cumulative indicator that uses volume and price to assess whether a stock is being accumulated or distributed.

The A/D measure seeks to identify divergences between the stock price and the volume flow.

This provides insight into how strong a trend is.

If the price is rising but the indicator is falling, then it suggests that buying or accumulation volume may not be enough to support the price rise and a price decline could be forthcoming.

The Accumulation/Distribution Indicator (A/D) Formula

MFM = (Close − Low) − (High − Close) / (High − Low)

Where:
MFM = Money Flow Multiplier
Close = Closing price
Low = Low price for the period
High = High price for the period

Money Flow Volume = MFM × Period Volume

A/D = Previous A/D + CMFV

Where:
CMFV = Current period money flow volume

How to Calculate the A/D Line

Start by calculating the multiplier. Note the most recent period’s close, high, and low to calculate.
Use the multiplier and the current period’s volume to calculate the money flow volume.
Add the money flow volume to the last A/D value. For the first calculation, use money flow volume as the first value.
Repeat the process as each period ends, adding/subtracting the new money flow volume to/from the prior total. This is A/D.

What Does the Accumulation/Distribution Indicator (A/D) Tell You?

The A/D line helps to show how supply and demand factors are influencing price. A/D can move in the same direction as price changes or in the opposite direction.

The multiplier in the calculation provides a gauge for how strong the buying or selling was during a particular period. It does this by determining whether the price closed in the upper or lower portion of its range. This is then multiplied by the volume. Therefore, when a stock closes near the high of the period’s range and has high volume, it will result in a large A/D jump. Alternatively, if the price finishes near the high of the range but volume is low, or if the volume is high but the price finishes more toward the middle of the range, then the A/D will not move up as much.

The same concepts apply when the price closes in the lower portion of the period’s price range. Both volume and where the price closes within the period’s range determine how much the A/D will decline.

The A/D line can help assess price trends and potentially spot forthcoming reversals. If a security’s price is in a downtrend while the A/D line is in an uptrend, then the indicator shows there may be buying pressure and the security’s price may reverse to the upside. Conversely, if a security’s price is in an uptrend while the A/D line is in a downtrend, then the indicator shows there may be selling pressure, or higher distribution. This warns that the price may be due for a decline.

In both cases, the steepness of the A/D line provides insight into the trend. A strongly rising A/D line confirms a strongly rising price. Similarly, if the price is falling and the A/D is also falling, then there is still plenty of distribution and prices are likely to continue to decline.

The Accumulation/Distribution Indicator (A/D) vs. On-Balance Volume (OBV)

Both of these technical indicators use price and volume, albeit somewhat differently. On-balance volume (OBV) looks at whether the current closing price is higher or lower than the prior close. If the close is higher, then the period’s volume is added. If the close is lower, then the period’s volume is subtracted.

The A/D indicator doesn’t factor in the prior close and uses a multiplier based on where the price closed within the period’s range. Therefore, the indicators use different calculations and may provide different information.

Limitations of Using the Accumulation/Distribution Indicator (A/D)

The A/D indicator does not factor in price changes from one period to the next, and focuses only on where the price closes within the current period’s range. This creates some anomalies.

Assume a stock gaps down 20% on huge volume. The price oscillates throughout the day and finishes in the upper portion of its daily range, but is still down 18% from the prior close. Such a move would actually cause the A/D to rise. Even though the stock lost a significant amount of value, it finished in the upper portion of its daily range; therefore, the indicator will increase, likely dramatically, due to the large volume. Traders need to monitor the price chart and mark any potential anomalies like these, as they could affect how the indicator is interpreted.

Also, one of the main uses of the indicator is to monitor for divergences. Divergences can last a long time and are poor timing signals. When divergence appears between the indicator and price, it doesn’t mean a reversal is imminent. It may take a long time for the price to reverse, or it may not reverse at all.

The A/D is just one tool that can be used to assess strength or weakness within a trend, but it is not without its faults. Use the A/D indicator in conjunction with other forms of analysis, such as price action analysis, chart patterns, or fundamental analysis, to get a more complete picture of what is moving the price of a stock.

Concluding Thoughts

The Accumulation/Distribution Indicator (A/D) provides valuable insights into the underlying supply and demand dynamics of a security, helping traders confirm trends or spot potential reversals.

However, as with any technical indicator, it has its limitations, and traders should use it in conjunction with other tools and analysis methods to make informed trading decisions.