ABSOLUTE BREADTH INDEX
Overview
The Absolute Breadth Index ("ABI") is a market momentum indicator that was developed by
Norman G. Fosback.
The ABI shows how much activity, volatility, and change is taking place on the New York
Stock Exchange while ignoring the direction prices are headed.
Interpretation
You can think of the ABI as an "activity index." High readings indicate market
activity and change, while low readings indicate lack of change.
In Fosback's book, Stock Market Logic, he
indicates that historically, high values
typically lead to higher prices three to twelve months later. Fosback found that a highly
reliable variation of the ABI is to divide the weekly ABI by the total issues traded. A
tenweek moving average of this value is then calculated. Readings above 40% are very
bullish and readings below 15% are bearish.
Example
The following chart shows the S&P 500 and a 5week moving average of the
ABI.
Strong rallies occurred every time the ABI's moving average rose above 310.
Calculation
The Absolute Breadth Index is calculated by taking the absolute value of the
difference between NYSE Advancing Issues and NYSE Declining Issues.
Absolute value (i.e., ABS) means "regardless of sign." Thus, the absolute
value of 100 is 100 and the absolute value of +100 is also 100.
