Charting Market Breadth Indicators
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Market breadth data charts often look erratic and “noisy” since the data is usually a count or percentage of stocks rather than a price. This means that the values can fluctuate dramatically from day to day. Some breadth indicators even regularly fluctuate between positive and negative values.
The chart below shows S&P 500 ($SPXADP). It oscillates above and below the zero line, within the +100% to -100% range.
The chart shows that the values change wildly from day to day, making it erratic. The horizontal lines added to the chart help to identify the big moves that exceed +80% or -80%, but it is difficult to determine what is happening between these levels.
Fortunately, StockCharts offers three different chart types that are especially valuable for reducing the “noise” on market breadth charts and making it easier to read and interpret them: Histogram, Cumulative, and Invisible chart types. Each of these chart types will be discussed below.
A histogram chart represents each period as a bar extending from zero to the period's closing value. For regular stocks, where the value is always positive, the histogram chart doesn't look that different from an area chart. However, a histogram chart is helpful for breadth indicators, where the daily values can be negative.
The chart above shows the same indicator ($SPXADP) but charted as a histogram. To do this, change the Type dropdown in the Chart Attributes section to Histogram and click Update.
The histogram chart plots the same data as the line chart, but the histogram format makes it easier to see clusters of up or down days. The horizontal lines make it easy to spot overbought and oversold levels. Our chart is already easier to interpret.
Histogram charts are useful for any indicator that oscillates around the zero line. Net advances, net advancing volume, and net new highs are classic examples.
A cumulative chart creates a running total of an indicator's periodic values. This indicator adds the periodic value when positive and subtracts the periodic value when negative. Just like Histogram charts, Cumulative charts are best suited for indicators whose daily values fluctuate between positive and negative values.
The chart above shows $SPXADP again, but charted as a cumulative indicator. To do this, change the Type dropdown in the Chart Attributes section to Cumulative and click Update.
Note: If you have any horizontal lines from the previous example on your chart, you will want to remove them from this chart.
This type of chart smooths out the day-to-day volatility of the raw data, and allows the chartist to more easily see trends in the market breadth values over time.
Note: The absolute values for an indicator plotted in cumulative mode are irrelevant, changing based on where the calculation started for each chart. Users should disregard the scale on the right side of cumulative charts and just focus on the characteristics of the line plot. Namely, determine the trend and compare it to price action in the underlying index.
Another way to smooth the erratic raw data of market breadth indicators is by using a moving average. But how do you display the moving average without showing the raw data? This is done using the Invisible chart type.
To replicate this chart, change the Type dropdown in the Chart Attributes section to Invisible, add the 10-day SMA plotted behind the price, and click Update (see below).
The raw data is an oscillator, with values fluctuating above and below the zero line. The SMA line smooths out the values and creates a less “noisy” oscillator. This makes it easier to see and act on signals like zero-line crossovers.
While Cumulative and Histogram chart types are used almost exclusively with market breadth indicators, Invisible is a chart type that can be useful for other ticker symbols, especially those showing a lot of volatility. This often happens during periods of consolidation.
For example, the Invesco QQQ Trust ETF (QQQ) was very volatile during a few periods in 2009–2010. Chartists could benefit from making its price plot invisible and focusing on its moving averages instead.
Spotting the trends during these volatile periods is easier without the daily candlesticks.
The Histogram, Cumulative, and Invisible chart types are valuable resources for your market breadth analysis in SharpCharts. Using these chart types can reduce the noise on many breadth indicator charts, making it easier to interpret the data. These chart types can be used on the main price plot or in indicator panels wherever needed to smooth erratic breadth data.
The Cumulative chart type is typically used to create the from the Net Advances Indicator, the from the Net Advancing Volume Indicator, and so forth. While plotting any ticker symbol using the Cumulative chart type is possible, the chart will not provide any useful information when used with securities where the value is always positive. The real usefulness of this chart type is in plotting securities where the values fluctuate above and below zero.
The chart below plots $SPXADP with a 10-day (SMA) line of the $SPXADP values. The noisy AD Percent line is not visible since the $SPXADP data is charted using the Invisible chart type. This allows you to focus only on the visible 10-day SMA line.
