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 ten-week 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 5-week 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.

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