2020 had been a difficult year that saw a major review of financial strategies due to the onset of Covid-19. It seems that 2021 will be no different as the global pandemic continues to affect the markets. With that being said, analyzing the market has become essential to produce the most informed investment decisions possible. To assist with this effort, here are the top five charts of 2023 to focus on when analyzing the market breadth.
The first chart is the Advance-Decline Line (ADL). This chart represents the daily net difference between the number of advancing stocks and declining stocks, giving investors an overview of the overall market performance. ADL is usually calculated with the S&P 500 Index, and its direction indicates whether the market is in an uptrend or a downtrend. If the line is increasing, it implies that the S&P 500 is gaining and the market breadth is strong; conversely, a decreasing line indicates a weakening market breadth.
The second chart is the New High–New Low Index (NH-NL). This index is calculated from the simple difference between the number of stocks hitting a new 52-week high and the number of stocks hitting a new 52-week low over a specific time period. When the NH-NL is increasing, it implies that more stocks are reaching new highs, creating bullish sentiment in the market. A decreasing NH-NL Index, however, suggests that more stocks are dropping to new lows, and that the trend is bearish.
The third chart is the Arms Index (TRIN). This index is calculated by taking the ratio of the number of advancing stocks to the number of declining stocks, then dividing it by the total volume of the advancing stocks and declining stocks. If the index is below 1, it implies a bullish market sentiment; conversely, a reading above 1 implies a bearish sentiment.
The fourth chart is the Nasdaq Momentum Indicator (NMI). This indicator measures the trend in the Nasdaq Composite Index by utilizing its Exponential Moving Average (EMA). A rising NMI implies a potentially bullish trend; conversely, a declining NMI suggests a bearish trend.
The fifth chart of 2023 is the Intraday Intensity Index (III). This index measures whether market activity is increasing or decreasing by analyzing the daily volume of trade on the Nasdaq. A rising III suggests that market activity is increasing, implying that trading momentum is potentially strengthening; on the other hand, a declining III implies that market activity is decreasing and that there is potential weakening trading momentum.
These five charts provide an important insight into the market breadth and are essential tools for investors to analyze the market. It is important to remember, however, that no single chart can provide an accurate picture of the entire market. Therefore, investors should use a combination of these charts in order to make the most informed decision when investing.