Absolute Breadth Index (ABI) Definition and Tutorial
The Absolute Breadth Index (ABI) measures the difference between how many stocks are advancing and how many are declining. Regardless of whether there are more advancing or declining stocks, the difference between the two is always positive (absolute value means a value without regard for the sign in front of it, such as a negative “-“). The ABI is known as a sentiment indicator, because it measures how investors feel about stocks as a whole (buying or selling them).
A low absolute breadth index number indicates that advancing and declining issues are roughly in balance, and therefore overall market volatility is likely low. When the ABI value is very high it indicates that many stocks are either advancing or declining, and therefore volatility (price movement) is likely to be higher.
The ABI does not account for magnitude of moves though, just whether a stock is advancing issues or declining issues relative to the prior days closing price. Therefore, ABI is not always a reliable indicator for volatility.
ABI can be applied to any group of stocks, but is typically applied to all stocks on an exchange, such as the NYSE, or to a specific sector of stocks such as Financials, or to an index like the S&P 500.
Here’s the calculation for ABI:
- ABI = Absolute Value [(Number of Advancing Stocks) – (Number of Declining Stocks)]
Application of the Absolute Breadth Index (ABI)
ABI is typically used on daily or weekly charts. Applying ABI to an intraday chart won’t likely provide useful insight. The absolute Breadth Index was developed by Norman Fosback, he argued that very high ABI values are likely to lead to an eventual rise in the stock prices being analyzed. Very low ABI values tend to lead to declines in stock prices.
The problem is that ABI is not a timing indicator. There is often a delay between when ABI creates an extreme high or low value and starts to reverse, and when price creates an extreme high or low value and starts to reverse.
The chart below shows five years of data. In 2011 the very high ABI value may have helped signal the drop in the S&P 500 was near completion and that prices would eventually start to rise, which they did.
Absolute Breadth Index (ABI) on S&P 500 – 5 Year Chart
The longer-term chart above shows the ABI ranged between about 1400 and 600 between 2013 and 2015. During this time frame those were extreme levels (but on the long-term chart they were not). The chart below shows how the price reacted when the ABI reached those levels in 2015. When the ABI approached 600 the S&P 500 experienced a decline (briefly). The reading of 1400 resulted in an eventual move higher.
The Absolute Breadth Index is Similar, or Related, To:
- Advance/Decline Ratio
- Advance/Decline Line