What is it?
Shows how volatile and active a given market is while ignoring price direction.
This tool is classified as a breadth indicator; these indicators generally show the amount of participation in the movement of a stock market. It can be used to answer the question ‘how broad is the rally or sell-off?’.
The Absolute Breadth Index was developed by Norman Fosback and he also called it the ‘going nowhere’ indicator because it totally disregards market direction. It shows market activity or lack thereof.
How is it calculated?
Absolute Breadth Index = advancing issues – declining issues
It is calculated by taking the absolute value of the difference between advancing issues and declining issues. It does not matter whether there are more or less advances or declines, it is the absolute difference between them. Traditionally the New York Stock Exchange is used, however any other exchange can be used.
How do you read it?
High Absolute Breadth Index
The higher the number the more likely it indicates a potential market bottom – when the difference between the advances and declines is high, the price changes are also big, which, in turn, can mean the market is more prone to being at a bottom than at a top. It also indicates increasing volatility, which in turn can signal significant changes in stock prices in the coming weeks.
Low Absolute Breadth Index
The lower the number the more likely it indicates a potential market top – if the difference between the advances and declines is small, the market is not going anywhere and probably more near a top.
I created a weekly chart below with the Absolute Breadth Indicator and smoothed it to 21 days. I’ve highlighted in green four spikes, all of which coincide with an approximate market bottom.