Absolute Breadth

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The Absolute Breadth Index (ABI) was developed by Norman G. Fosback and described in his book "Stock Market Logic". The ABI is a market indicator that is used in technical analysis to determine volatility levels in the market without factoring in price direction. Referred to as a market momentum indicator, the absolute breadth index (ABI) is equal to the absolute value of the difference between the advancing issues and the declining issues. It shows how much activity, volatility and change is taking place on the NYSE or any other index and corresponding market sector.

The Absolute Breadth Index is classified as a breadth indicator because its calculations are based on advancing/declining values and these values are the only ones used to create it. Traditionally the New York Stock Exchange (NYSE) has been used as the standard when it comes to using advance/decline-based technical indicators. However, the ABI index can be calculated using any exchange or subset of an exchange (index).

The absolute breadth index is a measure of internal volatility. It calculates the absolute value of the difference between the number of advancing and declining stocks, making it a slight variation on the A/D spread. The formula for ABI looks like this:

ABI = | (Number of Advancing Stocks - Number of Declining Stocks) |

Because the ABI is an absolute value, it will always be positive. The chart is a representation of the volatility in the spread between advances and declines. The ABI can be smoothed by using a moving average to draw longer-term trend lines. A fast-paced, choppy chart of the ABI can indicate a choppy market.

The ABI ignores the direction in which prices are going. Typically, large numbers suggest that volatility is increasing, which is likely to cause significant changes in stock prices during the coming weeks. If the ABI index readings have low values, this indicates that no changes are taking place. It shows only market activity. In Fosback's book, Stock Market Logic, he mentioned that high values historically have caused higher prices 3-12 months later. Fosback found that a highly reliable variation of the ABI can be created by dividing the weekly ABI by the total issues traded. If, after 10 weeks, a moving average is calculated and the readings are less than 15%, they are called "bearish." Readings higher than 40% are called "bullish."

Chart 1: S&P 500 - ABI (Absolute Breadth Index)

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