Thursday, September 19, 2013

Absolute Breadth Indicator (ABI) and the mood of market

     What is Absolute Breadth Indicator (ABI)?  How it can be calculated?  How it impacts the total mood of the market?  How useful is it in selecting the shares. 

    There is an interesting scene that all teachers including the headmaster running away when the Inspection Officer (IO) reaches at school without any notification.  Even today, the teachers of  government schools welcome their IOs with a bit fear in mind.  In older days, when the head-counting was not an issue, the teachers were trying hard to make ready their students to perform well in front of IO, by giving them special practices and revisions in the syllabus as well as the general knowledge.  The clever ones would be given the seat in the front-bench itself in order to reply quickly to the surprise of IO, when he throws a question towards the students.

     I still remember that the IO came without the usual seriousness that day.  The front row became ready to face any questions after the IO pleased with the attendance register and other documents.  But, ignoring the front row, IO threw a question towards one of the students of back-bench about the reason of Panippatt war.  The student, who got amazed by the question, even didn’t know why he was coming to school.  Two more students of the back-bench also were asked the same question though, the performance was very poor to the disappointment of the class teacher who watched the developments through the window.   The front-bench team, who were all set to answer any questions, were absolutely ignored.  IO moved to the next class with a smile in his lips and we were forced to realize that the new IO knew the fact that a classroom is not only the front row of students who could answer any questions thrown at them.

     We would usually check the share prices of our portfolio when we hear the news that “Sensex shot up beyond 19,000 or 20,000 etc…  Probably it would lead to disappointment.  My shares would be still on the purchase price or below of that level!”  It is the investors’ common complaint that the shares in their hand are still not moving despite the share market booms. 

Absolute Breadth Indicator (ABI)
     It is here we have to understand the importance of Absolute Breadth Indicator (ABI) when we select the shares.  The indices are made by the best performing shares of different sectors.   Therefore, when we say that the index Sensex is up or down, it means the particular shares comprised in Sensex are up or down.  For this reason, the total mood of the market is ignored by the overwhelming trend of upward or downward movement of Sensex.   There is possibility to go down or not to change in the prices of a number of shares even when the Sensex is going up.  Probably, this is the mistake that happens to the common investors who expect that the shares, other than Sensex shares, are better to invest than the Sensex shares.   When they hear the news that the Sensex is up, they would purchase the stocks as they misunderstand that the bulls are dominant.  But, though the sensex was up, the bulls still may not have reach in the market yet.  That is why the aforesaid complaint commonly arises from the investors always.

ABI and the total mood of market
     As the inspection officer understood that a classroom is not only the bright students of a front row, the fact which we should understand at the beginning is that the share market includes not only the shares of Sensex.   In order to understand the total mood of the market, we have to know that the number of traded shares in the market.  These information are available in BSE and NSE websites.  Next, check, how many traded shares were up, how many were down and how many were that didn't change.   

     As all these information are available in the website, an investor only needed to know that what the ABI means.  If the most traded shares are up, that means the market has strong breadth.  For example, if the total traded shares are 1800 numbers and in which, 1200 shares are up, 300 is down and 300 didn’t change.  Here, the net advance is 900.  ie,  subtract 300 from 1200  and the result is 900.  Here, the ABI is 50%. (900/1800X100=50%).  It is important that we should understand the ABI above 40% indicates the bullish trend and below 15% indicates the bearish trend.  Commonly most share prices are going up or down as per the mood of market. Therefore, understanding the mood of market will definitely help you highly.

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