More Hints on Market Breadth

Many of you have seen my posts on market breadth, summed up as the internal health of a rally. Because of weighting of the averages, buying a handful of stocks can close the market in the green even though there may be a majority of stocks closing in the red. Market breadth is a longer term study of these kinds of metrics. We've seen some consistently bad and in some cases worsening market breadth. Last night and today, I took advantage of my Worden affiliate status and ran a few scans in their new TC2000-beta (version 11 of TeleChart) which will be coming out soon.

I specifically ran scans on my crossover screen which you may have seen, it looks like this.

In the top pane is a 10-day simple moving average in yellow and a 22 day simple moving average in Blue. The middle window has a custom cumulative indicator in yellow and a 22 day moving average (of the custom indicator)  which acts as a signal line. The bottom window has RSI 22 in white (note it's about 50% longer then the standard RSI most technicians use), the yellow trendline in that window represents "50" for RSI and there's a MACD Histogram. The purpose of this screen is to weed out false moving average signals of whipsaws which are a big problem for any moving average based signal system.

On the chart above you can see there was a downtrend, all 3 indicators called it a downtrend and it lasted  4 months without a single false signal suggesting otherwise. The white boxes you see are showing all 3 necessary components for a long signal, in the top and middle window, yellow indicators must be above blue and in the bottom, RSI must be greater then 50. The reverse is true for a short signal and this can also help with trade management.

So I ran two scans looking for crossovers on Friday, both for long and short positions. I used all US common stocks as my watchlist and after I completed the scan, I went through every symbol and looked for good, healthy trending stocks like this. I prefer a smooth transition such as this to a stock that is long for a few weeks and then short, they don't make for good trending trades.

After culling my list down, I came up with 63 stocks that looked promising as potential short candidates and only 5 that looked the same as long candidates. Many of the stocks having showed up on the long scan were doing exactly what I don't like and had made numerous crossovers in the last month or two. Many in fact were simply crossing back over due to volatility associated with tops and thus would not make for suitable long candidates. Here's an example of the kind of chart I'm talking about.

As you can see there were two long signals followed by the most recent on Friday, the cross-down was not a true short signal and the volatility seen in the white box probably explains why we are seeing a crossover now, but that doesn't make this stock a good trending candidate such as what we see above in EEE.          

Although this is a day's worth of data, I think it may be indicative of another aspect of the market's breadth. For WOWS subscribers, I'll be checking out the candidates with 3C and I'll be adding them to the January trade list. The majority of these trades will be longer term in focus. Other scans will be used to find additional long possibilities.