Absolute Breadth Index Overview
The Absolute Breadth Index or ABI steps store volatility.
Unlike other technical programs, the ABI will not predict store leadership. Thus the index can be called the moving nowhere index.
The inventor of the index, Norman G. Fosback, before all else introduced the index from the publication “Stock store logic”. If you would like to go deeper in the novel, check it from Amazon.
How to Calculate the ABI
The ABI is a simple calculation and can be the following:
(Number of Advancing Issue – Number Declining Issue)/(Number of Advancing Issue Number Declining Issue)
This value is expressed as a few.
Absolute Breadth Index Readings
While the ABI doesn’t earn any store forecasts, exceptionally substantial readings frequently result in a pause market management.
In the beneath graph, we’ve got Visa Inc. (V) in the left and right QQQ Powershares ETF about the proper.
Notice the way superior ABI readings contribute to pauses in tendency throughout store sell-offs.
This makes sense for a market can grow with very low volatility, however, those sell-offs may product high volatility slopes as feeble longs start fear selling.
Absolute Breadth Index Example
Absolute Breadth Index vs Advance/Decline Index
The Absolute Breadth Index seems like the advance/decline indicator. Nevertheless, the most important distinction may be that the ABI uses values.
Therefore the advance/decline indicator may grow and fall round the zero-line.
Trading with the Absolute Breadth indicator
Exchanges and Sectors
It is important to note that the ABI is for the NYSE.
Traders may even build their own complete diameter indicator such as such as appearing at the range of advancing and declining assets within a portfolio or inside an industry.
Weekly ABI Readings
Fosback theorizes in his own publication that there is a greater degree of confluence whenever you carve the weekly ABI by the overall issues traded.
Historically, higher worth on the weekly ABI imply amounts are most likely to grow on the following three to 12 weeks.
Best Timeframe for your Indicator
The complete width index is Ideal for Longterm trading. That is a result of this simple fact that the index is linked with the total store and extreme readings have the time to grow.
Hence the index is best for swing traders and longterm traders.
Trading Example with ABI
Below is a daily chart of Microsoft (MSFT) and also the Absolute Breadth index together with all the 50 along with 200-day easy moving averages.
After the before all else bullish cross over of this SMA, the query is really where you should obtain long?
Extreme ABI Readings
When looking back at the graph, a worth of 3,800 over the ABI will activate a movement greater in MSFT.
For each extreme ABI reading we ring the violation of 3,800 significance in crimson.
Notice these extreme readings result in a form of rally at the share. Before you go around and get started purchasing every reading, you have to consider you must join the reading along with other trade signs.
For instance, you’re able to observe how MSFT has been hitting amount support with a few of the readings. It is also possible to view there’s just a gold cross from the graph too, where in fact the 50-period SMA crosses across the 200.
These samples of confluence in the graph in conjunction with extreme ABI readings increase the probability of a prosperous trade.
Trading with an Absolute Breadth Index
ABI using Bollinger Bands
Bollinger rings are a volatility index and consequently Is an Excellent game for your ABI.
Below is your daily graph of Twitter using both Bollinger Bands and also the ABI.
Bollinger rings with ABI
In the preceding case, you can find just two examples of a lengthy-standing. In each scenario, it wasn’t like the candlesticks were closing outside of the bands.
The signals really are about the amount hitting support, high ABI readings and the candlestick getting close to the lower bands.
After this level of confluence, there were short-term amount increases which are great for swing traders.
The absolute breadth index is great when you combine signals with blue-chip assets. This is because large-cap assets are most likely to be impacted by movement in the broad store.
Using the ABI to identify trade opportunities for low float assets is likely a nonstarter. Not because the ABI is defame, it’s more about the volatility of penny assets cares little with broad store activity.