Breadth thrust is an internal indicator and it is a ratio of moving averages that creates an excellent judge of market momentum.
In this session of technical analysis, we will discuss Market Breadth Indicators.
Breadth thrust is an internal indicator and it is a ratio of moving averages that creates an excellent judge of market momentum. The breadth thrust indicator creates a percentage value that moves just like a traditional oscillator from 1 to 100.
It can be read just like a stochastic or RSI, where overbought and oversold levels are at the extremes. Divergence with the underlying price chart points to weakening momentum. The number of days to set for the moving averages should be determined by the time-period being evaluated.
It is developed by Richard Arms, TRIN is a double-ratio that divides the A/D ratio by the A/D volume ratio. The formula for TRIN = (# of Advancing Stocks / # of Declining Stocks) / (Volume of Advancing Stocks / Volume of Declining Stocks). A value of less than 1 means advancing stocks are getting more than their share of volume, which is bullish for the market.
When the value of TRIN is more than 1, declining shares are taking an outsized amount of volume, which is bearish for the market. TRIN is usually smoothed using a moving average, which should be tuned to the time-period being evaluated. Trend lines drawn from the moving average reveal the direction of market momentum.
McClellan oscillator is another internal indicator. The formula for McClellan Oscillator = [19-Day Exp. Moving Average of (# of Advancing Stocks -# of Declining Stocks)] / [ 39-Day Exp. Moving Average of (# of Advancing Stocks -# of Declining Stocks)].
This formula creates a ratio comparing the 19-day and 39-day EMA of the A/D spread. The chart is an oscillator that ranges from +100 to –100 with overbought and oversold levels usually found at +70 and –70, respectively.
The McClellan Oscillator can be read just like any other oscillator and is usually not smoothed, but it can be charted with a moving average as an indicator line.
(The author is Associate Vice President - Analyst-Derivatives at Motilal Oswal Financial Services Limited)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.