Using Optuma’s Market Breadth Engine – Part 1

by Jun 28, 2019All Articles, Technical Analysis

Optuma’s Market Breadth engine allows you to create your own breadth measures for any index or list of symbols, such as your portfolio. Not only are you able to create percentages of stocks meeting a certain criteria (e.g. close above the 200MA) but you can also create sums of values, and even calculate averages. While we often think about breath in terms of closing prices and volume, the Optuma Breadth Engine allows you to create breadth measures on any data point you can think of, for example Volatility Breadth, Gann Swing Breadth, or PE Ratio Breadth.

Breadth Theory

The theory behind Market Breadth in Technical Analysis is that we are using it to find early warning the market is weakening even though the indexes are still going higher. Typically at the end of a long bull run, the public is excited about all the stock market gains that have occurred and they want in. What stocks do they buy? The large cap names that are all over the news! Google, Apple, Tesla, BHP. Rarely will an unsophisticated investor pick a small cap name which has potential to grow. Rather they pick names that are at all time highs.

This is why at the end of a bull market we see the big names pushing on higher. There’s renewed buying pressure from everyone jumping on board. What is not seen however is that the small cap stocks are dropping. What’s deceiving about this is the Index (S&P500, ASX200, FTSE100) will be making new highs because the bigger the company, the bigger it’s impact on the index. We need a way to identify when the index is still climbing but the small caps are falling because that is telling us that “smart” money is leaving the market.

This is why we use Breadth to look ‘inside’ the index (and why you may see breadth measures referred to as market internals). We take all the stocks in the Index and count how many are moving higher (advancing) and how many are moving lower (declining). When we see a divergence between the trend of the Index and the number of stocks advancing, then we say the move does not have broad support and we see that as a sign of weakness.

The longest obvious period of divergence I found was in 2000. It was the bull market leading to the dot com crash. I use that example below because it clearly shows the divergence between the Advance – Decline Line (the cumulative difference between the number of advancers and the number of decliners) and the S&P500 Index itself. The dot.com “boom” was driven by the Technology sector, so it was not going to have broad support across the market. The craze about Tech was so intense that many people were moving funds from other sectors. That’s why we see the long term divergence so clearly during this period.

A lack of broad market support is often a sign the end of the bull market is coming.

The divergence between the Advance - Decline Line - S&P 500 INDEX

What happened to Breadth?

If we look at the Advance Decline line (the most common measure of Breadth), it has become hard to find examples of divergence. The reason for that has been the rise of Index based ETFs. Because buying the SPY spreads the investment over the whole S&P500, we just don’t see that as clearly anymore.

The solution is to use different measures of Breadth (see my Volatility Swings Breadth Post for an example), or use a bigger universe of stocks. We can use either the whole market (remember to only use common stocks and not ETFs or ETPs), or if available, a bigger index.

Breadth in Optuma

There are two ways to use Breadth in Optuma. The first is the easy way. Select “Breadth Measures” as one of your data selections in Optuma and you will have a list of common measures to use on major indices. You will need to overlay the breadth data by right-clicking on the chart and adding the breadth data into a New Window.

That’s a bit of a manual process, so watch out in Optuma 1.5 (due Q3 2019) for an extension to the Bloomberg tool called “Breadth Data”. Currently if you use Optuma on top of Bloomberg, the Breadth Data tool will link directly to all the Breadth Measures available in Bloomberg for the index being charted. In Optuma 1.5, it will also work with Optuma’s Breadth Measures data group.

The harder, but more flexible way, is to use the Optuma Breadth Engine. You can create a true/false script that defines your classification of a strong stock versus a weak stock. Optuma will count how many are strong and do that back through history. The best thing about the Optuma Breadth Engine is that you are not limited to Index members or stocks—you can create breadth measures on any group of securities. Your own portfolios too.

If you want to read more about how you can use Optuma’s Breadth Engine to create your own measures, have a look at the research paper I wrote on Gann Based Market Breadth at optuma.com/research

Next time we will have a closer examination of how you can use Breadth measures with a portfolio and the different ways you can use the breadth measure.

Share Link
Mathew Verdouw, CMT, CFTe

Mathew Verdouw, CMT, CFTe

CEO / Founder Optuma

As a Computer Systems Engineer, Mathew started Market Analyst (now Optuma) within 18 months of completing his degree. From that point on, Mathew has made it his mission to build the very best software tools available. 

Since 1996 Mathew has been learning about all aspects of financial analysis, and in 2014 earned the CMT designation (Chartered Market Technician). In 2015, he was also awarded the CFTe designation. In 2017, Mathew started to teach the required content for the CMT exams at learn.optuma.com. He is the only person in the world who teaches all three levels due to his broad exposure to all forms of financial analysis.

As someone who has dedicated his life to find better ways to analyse financial markets, Mathew is set to drive innovation in this sector for many years to come.

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *

Pin It on Pinterest

Share This

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close