Project Freedom (10): Trading with the BBC Breadth Indicator

What is a Market Breadth Indicator?
In short, a Market Breadth Indicator is a kind of Technical Analysis(TA) that design with the intention to gauge the direction of the overall market. 

Unlike most indicators in TA, which use only the information from a single stock to workout the indicator, Market Breadth Indicators are generated by analyzing the total number of companies in a given market. 

In general, it compares the advancing and declining issues in the market and uses specific formula to generate the ratio, such as TRIN (Arms Index),  and some use other filtering technique to smooth it out like various kind of McClellan Oscillators and Summation Index.

Actually, think about it, the price chart of SPY(S&P 500) and many other indices can also be viewed as a kind of Market Breadth Indicator too.

If those who want to know more about Market Breadth Indicators, there is an excellent book with good coverage and detail formula on this area: The Complete Guide to Market Breadth Indictors: How to Analyze and Evaluate market Direction and Strength by Gregory L. Morris (Sep 21,2005)


Why using Market Breadth Indicator?
For all classical Technical Analysis text books, they emphasis on buying the strongest stocks in the strongest sectors when the overall market is bullish, and selling the weakest stocks in the weakest sectors when the overall market is bearish. 

So, the very first step is to have a reliable indicator to know how is the overall market is performing. And, the best tool would be the market breath indicators - because they are calculated based on all components in the market.

The following picture using the school of fish as an analogy to illustrate the importance of Market Breadth Indicator...  It would be interesting to note that when the market is bullish, on various time from minute, day, week, to month...  most of the stocks would be up and vice versa in bearish market.  Of course, the market is formed by individual stock anyway. 

So, here are the two key important point for using Market Breadth Indicators:
1) using the Market Breadth Indicators is the very first step that can help traders/investors operations to be in sync with the market movement/ direction and have higher probability in winning!

 2) Market Breadth Indicators are less subected to noise and market manipulation.
In a previous blog entry on BACK TESTING...  The results have CLEARLY shown that Market Breadth Iindicators can withstand the test of time.



Why introducing the BBC Breadth Indicator?
Of all the Market Breadth Indicators in the public domain, all are calculated based on the one period advance and decline issues of the market.

Whereas the BBC (Bullish-Bearish-Consolidation) Breadth Indicator can used more advanced formulas and provide even simpler presentation for the user to understand the states of the market.

Take for examples, it can workout a Multiple-Time-Frames BBC indicators and display in the daily chart (or basically any time frame).



Charting Examples of BBC Indicator:(Note: click on each chart to ZOOM IN)

The following charts show various examples for the BBC Breadth Indicator.
In the following chart:

1) the top pane shows a tri-states (Bull, Bear & Consolidation) momentum indicator of SPY.

2) the second pane shows a tri-states Trend Indicator.(These Tri-states indicators were introduced in the previous blog entries).

3) the third pane shows the price chart of SPY.

4) the forth pane shows the Momentum BBC Breadth Indicator of SPY.  It was workout according the the above attached formula.  It calculates the total number of of Bullish, Bearish and Consolidation ticker, in Momentum wise, for the SPY (in this case, a total of 500).   Then it groups the number into Percentage of  BULL (Green Line), BEAR (Red Line) and Consolidation (Blue Line).

5) the last pane in the bottom shows the Trending BBC Breadth Indicator of SPY.    It calculates the total number of of Bullish, Bearish and Consolidation ticker, in Tredning wise, for the SPY (in this case, a total of 500). Then it groups the number into Percentage of BULL (Green Line), BEAR (Red Line) and Consolidation (Blue Line).

This can provide the user to have the winning probability in mind.  The best opportunities are when both Momentum and Trending Windows are opened and in Sync on one direction!
 

SPY (S&P 500 ETF)  Chart with BBC Indicators:

^STI Chart (30 Components) with BBC Indicators  (Obviously not so smooth as SPY)

Sector Chart (XHB) with BBC Indictors

China SSE 380 index (000009.SS) with BBC Indicators

QQQ Chart: Using BBC indicators as the Galaxy Chart's Companion: 
One way to use the BBC indicators is to put them in work together with the Galaxy Chart.  For example, the BBC chart can show the overall strength of the market (in this case, the QQQ), while the Galaxy Chart can pinpoint down to which particular stock within the QQQ is leading or lagging the overall ETF performance.  This works in ANY TIME FRAME in run-time.

Other Points to Considers:
* Most market breadth indicator are equal-weighted.  BUT, most index are Capital Weighted.  Some are Dollar Weighted, Dow Jones Industrial Average and Nikkei 225.  And, most ETF are Portfolio Weighted with component changing in quarters.  These are the factors that need to take into consideration when working with Breadth Indicators.

Wish that it has inspired you and good luck.
KH Tang



And, if it doesn't, never mind... the follow quote from "Edgar Cayce Handbook for creating your future" may....

"Are we to live only for ourselves, using others to our advantage, or are we to care

about someone or something beyond ourselves?  The first choice may lead to

greater comfort and convenience, at least temporarily.  The second calls

for the definite inconvenience of taking on the burdens of others. 

-- Only the second choice leads to happiness!"

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