Market Breadth
Because some volatility indexes are now tradable, many have criticized the
ever‐popular VIX as being less of a true reflection of the market participants’
general sentiment. The ability to impact or influence the VIX makes the index sus-
ceptible to manipulation and abuse. This distorts original function of the index,
which was to track implied volatility of market participants in the broad market.22.4 Chapter Summary
As we have seen, it behooves the practitioner to cross‐reference the behavior of
individual issues with that of the broader market activity. We have also observed
the effectiveness of identifying divergences and overextended levels of activity be-
tween market breadth data and price as a more reliable means of pinpointing
potential tops and bottoms in the market. As such, the use of market breadth data
is an indispensable tool for all serious practitioners.Chapter 22 Review Questions
- Explain the term market breadth and how is it different from market depth.
- Describe the type of market‐breadth indicator that would allow you to gauge
the strength of a trend. - List five breadth operations and their corresponding breadth indicators.
- Name and describe eight main challenges associated with using breadth
indicators. - Explain why you cannot add up five daily net advances to represent a week’s
net advance. - Describe how you would use the McClellan Oscillator with volume.
- What are the weaknesses associated with the Arms Index and how would you
rectify the issues? - What is the advantage of a ratio-adjusted breadth indicator?
referenCes
Arms, Richard W., Jr. 1989. The Arms Index. Dow Jones‐Irwin.
Kirkpatrick, Charles, and Julie Dahlquist. 2007. Technical Analysis: The Complete Re-
source for Financial Market Technicians. Upper Saddle River, NJ: Pearson Education.
Morris, Greg. 2006. The Complete Guide to Market Breadth Indicators. New York:
McGraw‐Hill.
Murphy, John. 1999. Technical Analysis of the Financial Markets. New York: New York
Institute of Finance (NYIF).
Pring, Martin J. 2002. Technical Analysis Explained: The Successful Investor’s Guide to
Spotting Investment Trends and Turning Points. 4th ed. New York: McGraw‐Hill.