When participating in trades, we want consensus to be on our side. We want to participate in trades which have highest probability of success. To be able to do this, we need to understand market sentiment. Breadth analysis is one of the best tools to understand market sentiment.

In today’s newsletter we will learn to use breadth analysis to understand the market’s sentiment towards different sectors of the market and try to identify sectors that the market is currently favoring for the short term.

Buzzing Sector? What is that?

The idea of Buzzing sector is simple. These sectors are the ones that are attracting attention due to significant news, recent earnings reports, or price action.

These sectors typically experience high trading volume and increased volatility, making them focal point for traders looking to capitalize short term opportunities.

Breadth and Point and Figure (PnF) Breadth

Breadth is a tool that calculates the number of stocks in the group of stocks that are participating in a set parameter. This parameter could be based on an indicator. The parameter could also be a pattern. PnF breadth uses PnF charts elements for breadth analysis. More precisely, it uses PnF patterns to understand market sentiment. There are 4 types of PnF patterns used for PnF breadth:

X% breadth: X% breadth calculates how many stocks are currently in a column of X. More number of stocks in column of X means a greater number of stocks are in their bullish swing.

DT% breadth: PnF charts are breakout charts. A bullish breakout suggests price was able to breach the previous high made by the price. Bullish breakout is an important information on PnF chart. This bullish breakout is depicted by a Double-Top-Buy pattern on PnF chart. DT% breadth calculates the number of stocks currently trading in the Double-Top-Buy column. This shows strong momentum.

X Anchor% breadth: Momentum means price moving in a particular direction quickly. This also means price moving without any reversal. This momentum is depicted as anchor column on PnF charts. X Anchor columns have more than 15 boxes in upward direction. X Anchor% breadth calculates the number of stocks currently in X Anchor column. This shows bullish momentum as well.

O Anchor% breadth: This breadth is opposite of the X Anchor% breadth and shows bearish momentum.

To identify buzzing sectors, we first go to RZone website (by Definedge securities). RZone → Breadth → Breadth Scanner → Choose P&F breadths → Choose the group and scan. For this newsletter, 1% * 3 box size is used and NSE Sectors is used as the groups.

After scanning, the results will be something like these:

Buzzing sectors will be the ones which have X% breadth of more than 80% and X Anchor% breadth of more than 20%. These sectors are the ones in a bullish momentum.

To participate in these sectors, the stocks must be individually analysed. The traders can shortlist the stocks meeting their criteria and then participate in those stocks that give a breakout on a lower box size on PnF chart or give breakout on intraday timeframe on candlestick charts.

I have found this to be one of the most objective ways to identify stocks that can give good returns in a short term. This method is only for the short term and the trader can experiment with the scanner to look for buzzing sectors for a longer holding horizon.