Absolute Breadth Index (ABI) - Momentum Indicator
Absolute Breadth Index Definition
The absolute breadth index (ABI) measures the amount of volatility on the New York Stock exchange. The indicator is truly a momentum indicator since it only tracks the movement of the issues on the exchange and not their direction. The absolute breadth index was created by Norman G. Fosback and discussed in detail in his book Stock Market Logic. The overall purpose of the indicator is to determine when the market is most volatile, thus providing the greatest opportunity for larger profits due to increased volatility. During periods of low ABI readings, traders will want to fade securities at their highs or lows, or simply stay in cash until better opportunities arise. In Fosback's book he discussed that when the ABI reading for the 10-week moving average was above 40 percent, it suggested a bullish market. While readings below 15 percent suggested a bear market. Now that there are far greater issues traded on the NYSE, these hard numbers for gauging primary trends are no longer valid. You as a trader will want to look at the current reading relative to recent levels of the ABI technical indicator to gauge whether or not the trend is bullish or bearish in nature. The absolute breadth index is calculated by taking the absolute vale of the difference of advancing issues by the number of declining issues.