The breadth line is one of the best and most commonly used methods of measuring the market breadth and internal market strength. The breadth line is also called the advance-decline line as it is the cumulative sum of advances minus declines.
On any day, three types of movements may be seen in stock price; advanced, decline or no change.Rise in breadth line is seen when number of advancing stocks are more than declining stocks. While line falls, when declining stocks are more than advancing stocks.
The standard formula for the breadth line is as follows:
Breadth line value on Day t = (number of advancing Stocks Day t – number of Declining Stocks Day t) + Breadth line Value of previous day ( Day t-1)
eg. Number of advancing stocks in Nifty on 24 April 2020 were 10 while 40 were declining stocks. Index Nifty closed session 159.50 points down at 9,154.40.
If we are calculating breadth line first time, we need to consider previous day value as Zero.
Breadth line value = (10 – 40) + 0 = -30
Breadth line can be constructed for a basket of stocks, any index or group of stock from a particular sector.
In an ideal situation, when the index is rising , the breadth line should also rise. It indicates that broad based rally i.e. majority of stocks in the index are contributing to gain in the index.
But when only a few stocks are contributing to the market rally, the breadth line falls as the number of declining stocks are more than advancing stocks. In such a scenario , breadth line does not follow the trend of index creating divergence.
When the index is reaching new price highs but the breadth line is not, a negative divergence is occurring. This signals weakness in the market . It also suggests that the market uptrend is in a late phase and may soon change direction.
Hey Namaste Trader! Find fastest way to follow the Market.