Strategic Financial Management · Fundamental Analysis and Technical Analysis

Technical Indicators and Market Breadth Explained

Updated 11 October 2026 · Fact-checked

Technical indicators are calculations on past price and volume that help you judge trend, momentum and turning points. Moving averages show trend, RSI and MACD show momentum, Bollinger bands show volatility, and advance-decline data show market breadth. To solve a question, compute the indicator, compare it with its rule, and state the signal.

Understand Technical Indicators and Market Breadth

Technical analysis studies past prices and volumes to predict future price direction. Fundamental analysis values a share from earnings, assets, industry and the economy, and asks what the share is worth. Technical analysis asks only what the price is doing. Fundamental analysis suits long-term investing. Technical analysis suits timing of entry and exit.

A moving average (MA) smooths prices. A simple moving average (SMA) gives equal weight to each of the last n prices. An exponential moving average (EMA) gives more weight to recent prices. When price crosses above its MA, it is read as a buy signal. When it crosses below, it is a sell signal. A short MA crossing above a long MA is a bullish crossover.

Momentum oscillators show how fast price is moving. The RSI ranges from 0 to 100. A reading above 70 is usually called overbought and below 30 oversold. MACD is the gap between a short EMA and a long EMA, usually 12-day and 26-day. A signal line, usually a 9-day EMA of MACD, is used for crossovers. Bollinger bands place bands a set number of standard deviations (usually 2) above and below a 20-day SMA. Wide bands mean high volatility and narrow bands mean low volatility.

Volume confirms a move. A price rise on rising volume is stronger than a rise on falling volume. Market breadth looks at how many shares take part in a move. The advance-decline line is the running total of advances minus declines. If the index rises but breadth falls, the rally is narrow and weak. These are rules of thumb, not guarantees, and signals can fail.

Key rules to remember

Simple moving average (n periods): SMA = (P1 + P2 + … + Pn) ÷ n; Equal weights. Drop the oldest price and add the newest for each new period.
EMA smoothing factor: k = 2 ÷ (n + 1); For a 9-period EMA, k = 2 ÷ 10 = 0.2.
Exponential moving average: EMA today = (Price today × k) + (EMA yesterday × (1 − k)); The first EMA is usually taken as the SMA of the first n periods.
Relative Strength (RS): RS = Average gain ÷ Average loss; Averages are over the period, usually 14. Losses are taken as positive numbers.
Relative Strength Index: RSI = 100 − [100 ÷ (1 + RS)]; Above 70 overbought, below 30 oversold, as a common convention.
MACD line: MACD = 12-period EMA − 26-period EMA; Positive means short-term average is above long-term average.
MACD signal line: Signal = 9-period EMA of MACD; MACD crossing above signal is bullish. Crossing below is bearish.
Bollinger bands: Middle = 20-day SMA; Upper = Middle + 2σ; Lower = Middle − 2σ; σ is the standard deviation of the same 20 closing prices.
Advance-decline ratio: A/D ratio = Number of advancing shares ÷ Number of declining shares; Above 1 means more shares rose than fell. Unchanged shares are left out.
Net advances and A/D line: Net advances = Advances − Declines; A/D line = Σ net advances; Cumulative total. Compare its direction with the index.

How to solve Technical Indicators and Market Breadth questions

Use this method for any numerical or interpretation question on indicators.

1Identify the indicator asked and the period given (for example 5-day SMA or 14-day RSI).
2Write the formula and list the data needed from the question.
3Compute step by step. Show each average, k value or ratio so marks are earned for working.
4Compare the result with the rule: price against MA, RSI against 70 and 30, MACD against signal line or zero, price against the bands.
5State the signal in one line: buy, sell or hold, and say whether it is bullish or bearish.
6Cross-check with a second indicator, volume or breadth if data are given. Say if they confirm or conflict.
7Add a short caution that technical signals are probabilistic and may give false signals.

Quickest way: Compute, compare, conclude

When to use it: For 2-mark MCQs and short numerical parts where only one value and one signal are needed.

Pick the formula and plug numbers directly. For EMA, find k first.
For RSI, get RS from average gain and average loss, then convert. If gain equals loss, RSI is 50.
For A/D, subtract declines from advances and ignore unchanged shares.
Match the answer to the threshold (70, 30, zero line, band) and read the signal.

Common mistakes in Technical Indicators and Market Breadth

Using the same weights for EMA as for SMA.
Both are called moving averages and the names look alike.
Fix: For EMA, compute k = 2 ÷ (n + 1) and apply it to today's price. Use SMA only for equal-weight questions or as the starting EMA.
Entering average loss as a negative number in RS.
Losses come from price falls, which are negative.
Fix: Take the size of losses as positive. RS = average gain ÷ average loss, both positive.
Treating RSI above 70 as a certain sell.
The rule is learned as a fixed trigger.
Fix: Say overbought suggests a possible reversal. In a strong trend RSI can stay high for long.
Dividing advances by total shares for the A/D ratio.
Confusion with a percentage.
Fix: A/D ratio is advances divided by declines. Unchanged shares are not in it.
Giving a signal without comparing the indicator with its rule.
Students stop after the calculation.
Fix: Always close with the line: indicator value, threshold, signal.
Mixing up fundamental and technical analysis in a comparison.
Both aim to find good trades.
Fix: Fundamental: intrinsic value from financials and economy. Technical: price and volume patterns. Contrast time horizon, data and purpose.

Worked examples

Example 1

Over a 14-day period the total of gains was ₹42 and the total of losses was ₹14. Compute the RSI and interpret it.

Show the solution

Average gain = 42 ÷ 14 = ₹3.
Average loss = 14 ÷ 14 = ₹1.
RS = 3 ÷ 1 = 3.
RSI = 100 − [100 ÷ (1 + 3)] = 100 − 25 = 75.
75 is above 70.

Answer: RSI = 75. The share is in overbought territory, so a pullback is possible. Confirm with other indicators before selling, since strong trends can stay overbought.

Example 2

A stock's 9-day EMA yesterday was ₹200. Today's close is ₹210. Compute today's 9-day EMA. Also, on a day the NSE had 1,200 advances, 800 declines and 100 unchanged, find the A/D ratio and net advances.

Show the solution

k = 2 ÷ (9 + 1) = 0.2.
EMA today = (210 × 0.2) + (200 × 0.8) = 42 + 160 = ₹202.
A/D ratio = 1,200 ÷ 800 = 1.5.
Net advances = 1,200 − 800 = 400.
Unchanged shares are ignored in both.

Answer: Today's 9-day EMA is ₹202. The A/D ratio is 1.5 and net advances are 400, showing positive breadth. Price is above its EMA, which is bullish.

Exam tips

Show the formula and every intermediate figure. Examiners give marks for method even if arithmetic slips.
Always end with a signal and a one-line recommendation. Numerical answers without interpretation lose marks.
In case-based MCQs, check whether the question gives losses as positive or negative before computing RS.
For comparison questions, use a short two-column style in points: basis, fundamental, technical. Cover data, horizon and purpose.
Mention divergence (index up, breadth down) when a breadth question gives both series.

Practice questions from Fundamental Analysis and Technical Analysis

Technical Indicators and Market Breadth: frequently asked questions

What is the difference between fundamental and technical analysis?

Fundamental analysis estimates intrinsic value from financial statements, industry and the economy. Technical analysis studies past price and volume to forecast price movement. Fundamental suits long-term investing, while technical is mainly used for timing trades.

How do you calculate MACD with an example?

Subtract the 26-period EMA from the 12-period EMA. If the 12-day EMA is ₹252 and the 26-day EMA is ₹248, MACD is ₹4. Then compare it with its 9-day EMA signal line to read crossovers.

What does RSI above 70 or below 30 mean?

By convention, above 70 shows an overbought share and below 30 an oversold one. These are warnings of a possible reversal, not sure signals. In strong trends RSI can stay in these zones.

What is the advance-decline ratio and why does it matter?

It is the number of advancing shares divided by the number of declining shares. A ratio above 1 shows broad buying. If the index rises while breadth weakens, the rally may be narrow and less reliable.