Market Breadth

Are the troops keeping up?

The Dow makes a new high. The S&P 500 follows. Headlines declare a bull market. But beneath the surface, fewer and fewer stocks are participating in the rally — most of the gains come from a handful of mega-caps. Is this a healthy market? Market breadth indicators answer that question.

Murphy frames it as a military analogy:

The advance-decline line tells us whether or not the broader universe of NYSE stocks is advancing in line with the most widely followed stock averages. To paraphrase a Wall Street maxim: the advance-decline line tells us if the "troops" are keeping up with the "generals." — Murphy, Technical Analysis of the Financial Markets

When the generals (index) advance but the troops (breadth) lag, the advance is built on a narrow foundation — and narrow advances precede major tops.

The advance-decline line

The simplest breadth indicator. Each day:

Cumulate these daily values into a running total — that's the advance-decline line. When more stocks advance than decline, the line rises. When declines dominate, it falls.

Murphy's key point about divergence:

The danger appears when the AD line begins to diverge from the Dow. When the Dow Industrials are hitting new highs while the broader market isn't following, technicians begin to worry about "bad market breadth" or an AD divergence. Historically, the AD line peaks out well ahead of the market averages. — Murphy, Technical Analysis of the Financial Markets

This is the single most important use of the A/D line: negative divergence — the index makes a new high, the A/D line doesn't. Historically, the A/D line has peaked months before major market tops (1987, 2000, 2007, 2021). It's one of the most reliable long-lead warning signals in TA.

Murphy also distinguishes daily from weekly:

The daily AD line is better used for short to intermediate comparisons. A weekly advance-decline line is considered more useful for comparisons spanning several years. It's necessary to show a similar divergence in the weekly AD line to confirm that a more serious problem is developing. — paraphrased from Murphy, Technical Analysis of the Financial Markets

The McClellan Oscillator

Developed by Sherman McClellan as an overbought/oversold oscillator for the A/D data:

It fluctuates around zero, with extremes typically ranging from +100 to -100. Murphy's interpretation:

A McClellan Oscillator reading above +100 is a signal of an overbought stock market. A reading below -100 is considered oversold. Crossings above and below the zero line are also interpreted as buying and selling signals. — Murphy, Technical Analysis of the Financial Markets

Think of it as MACD for market breadth. The 19-day and 39-day EMAs serve the same role as MACD's 12 and 26. Zero-line crossovers give intermediate signals; extremes beyond ±100 flag potential reversals.

The McClellan Summation Index is the cumulative version — it sums daily McClellan values to create a long-range breadth trend indicator. Crossings below zero on the Summation Index are serious negative signals.

New highs versus new lows

Murphy covers this as the second major breadth tool:

There are two ways to show these figures. One way is to plot the two lines separately. Since the daily values can sometimes be erratic, moving averages (usually 10 days) are plotted to present a smoother picture. — Murphy, Technical Analysis of the Financial Markets

A healthy bull market shows many more new highs than new lows. Warning signs:

1. New highs start declining even as the index rises.
2. New lows start expanding.
3. The 10-day MA of new lows crosses above the 10-day MA of new highs — a negative breadth signal.

The New High-New Low Index (the difference between the two) can be charted as a line and compared directly to the major averages. Murphy cites Elder, who calls it "probably the best leading indicator of the stock market."

Elder suggests plotting it as a histogram with a zero reference, making divergences with price easy to spot:

Crossings above and below the zero line reflect bullish and bearish shifts in market psychology. — paraphrased from Murphy citing Elder

The Arms Index (TRIN)

Richard Arms created a ratio-of-ratios that measures whether volume is flowing into advancing or declining stocks:

• TRIN below 1.0: more volume in rising stocks — bullish.
• TRIN above 1.0: more volume in falling stocks — bearish.
• TRIN spikes above 2.0+: extreme selling — contrarian buy signal.

Murphy notes that the Arms Index is a contrary indicator — it trends in the opposite direction of the market. A smoothed version (10-day moving average of TRIN) is widely used to gauge intermediate-term overbought/oversold conditions.

Upside vs. downside volume

The simplest volume breadth measure: compare volume in advancing issues to volume in declining issues. When upside volume dominates, buying pressure is broad. When downside volume dominates, selling is widespread.

This feeds directly into the Arms Index calculation, but can also be tracked independently. A persistent expansion in downside volume — even if the index hasn't broken down yet — is an early warning sign, similar to A/D divergence.

Putting breadth to work

1. Monitor the A/D line for divergences. If the S&P makes a new high but the A/D line doesn't, reduce risk. This signal can be months early — don't use it for timing, use it for posture.

2. Use the McClellan Oscillator for timing. Readings below -100 have historically preceded intermediate rallies. Above +100, expect a pullback.

3. Track new highs vs. new lows daily. A healthy uptrend should see expanding new highs. When the NH-NL Index crosses below zero, breadth has turned bearish.

4. Check TRIN after panic days. A TRIN spike above 2.0–3.0 on a selloff day is a capitulation signal — not a guarantee of a bottom, but a sign that selling may be exhausted.

Quick check

What you now know

• The advance-decline line measures whether the broad market confirms the index — divergences precede major tops.
• The McClellan Oscillator is MACD for breadth: below -100 = oversold, above +100 = overbought.
• New Highs - New Lows: a zero-line cross to the downside is a bearish breadth signal.
• TRIN (Arms Index) is a contrary indicator — extreme spikes signal capitulation.
• Breadth indicators work best as early warning systems — they often lead price by weeks or months.

Next: Sentiment Indicators — VIX, put/call ratio, and the contrarian logic of betting against the crowd when fear or greed reaches extremes.