Absolute Breadth Index Details

In most cases, a bigger ABI value indicates rising volatility, which is likely to bring substantial changes in stock prices. With smaller values, it is safe to assume that no changes are occurring. However, if there are changes, the ABI will not show their magnitude, but only whether a stock is going up or down based on their closing prices on previous days. This means the index is not an absolute measure of volatility.

The ABI is considered a breadth indicator since no other numbers are involved in deriving it other than the advancing and declining values. Obtaining this index can be done using an exchange or its subset, although the most widely recognized standard is the New York Stock Exchange.

Technically, the ABI is a primitive method of looking where a market is going. In fact, it is not meant to forecast market direction, hence its other name, the Going Nowhere indicator. At the same time, it is known as a sentiment indicator - it quantifies investors' overall vibe about stocks and whether to buy them or sell them.

Example of Absolute Breadth Index

The formula for computing the ABI is:

ABI = (Number of Advancing Shares - Number of Declining Shares) / (Number of Advancing Shares + Number of Declining Shares)

If there are 225 shares listed in a stock market, and in one session, 145 shares increased and 80 shares decreased, the ABI would be 0.29 or 29%. In a second session, if 65 shares went up and 160 went down, that session's ABI is 0.42 or 42%.

Absolute Breadth Index Analysis

The ABI comes in handy for determining volatility among a group of stocks and may reflect the volatility of any of the following:

  • an entire stock market when used on the NYSE Composite Index or the S&P 500 index
  • an exclusive stock market's industry or sector when used on Nasdaq 100, S&P Financials, and other market and sector indexes
  • a custom stock portfolio

Measuring volatility using the ABI is not a standard method. Conventionally, volatility is determined by analyzing price changes or price trading range over a particular period of time. As mentioned, when using the ABI, it is the difference between the number of advancing and declining stocks in an index, stock market exchange, or portfolio that determines the value.

Historically, high ABIs impact prices by increasing them after three months to a year. Dividing the weekly ABI by the total traded issues is also known to yield a very accurate variation of the index. If a moving average is recorded ten weeks later, and the numbers are under 15%, they are known as "bearish;" if above 40%, they are referred to as "bullish." However, the ABI does indicate timing. There is usually a delay from the index going extremely high or extremely low, then reversing, and when prices suddenly soar or suddenly sink before going the other way.

As an absolute value, the ABI will always be a positive number. Charts will speak of the volatility from advances to declines and back, and the value can be flattened with a moving average to make way for longer-term trend lines, where a choppy ABI chart equals a choppy market. When looking into patterns, it is crucial to note that since the ABI is dependent on data from the last trading session's close, it performs better on daily charts that cover a longer period.

The Importance of the Absolute Breadth Indicator

The role played by the ABI revolves around the two key factors involved in its calculation: advances and declines. For instance, when the ABI is high, which indicates significant price increases moving forward, a trader may avoid buying stocks and start selling them instead. The reverse is also true.

As well, traders generally use advances and declines with other types of technical analysis. For instance, they may check momentum indicators, such as the relative strength index (RSI), and look into advances and declines to ensure that a change in trend is indeed on its way. Furthermore, the indicator is frequently used by market technicians as part of asset management.

Similar to the ABI, other ratios are also advance-decline-centric, such as the Advance-Decline Ratio and the Advance-Decline Index. The key difference is that these two metrics consider the direction of price movements, while the ABI is only concerned with their differences as a way of quantifying volatility. The ABI also highlights the absolute levels of price movements, which means it is more accurate in showing volatility.

Development of the Absolute Breadth Index

The Absolute Breadth Index was developed by Norman George Fosback, an American stock market econometrician and researcher who earned his Bachelor of Science degree from Portland State University in 1969. A native of Astoria, Oregon, Fosback has been the President of the Institute of Econometric Research in Fort Lauderdale, Florida, since 1971 and a member of various industry organizations, such as the American Economic Association and the Econometric Society.

Fosback introduced the ABI in his technical investing book, Stock Market Logic, a Sophisticated Approach to Profits on Wall Street. But while intended for the NYSE, the ABI appears to be particularly useful when mixing signals with blue-chip stocks since broad market movements are known to affect large-cap stocks. It was clearly not intended to work on low-float stock trading as broad market events hardly affect penny stocks' volatility.

Two other famous works of Fosback include the Billion Dollar Funds, a mutual fund investment guide, and The Fidelity Handbook: Ratings, Charts and Evaluations for All Fidelity Funds. He is also listed as a "noteworthy stock market econometrician" in Marquis Who's Who, America's most reputable biographical data bank since 1898.