Breadth Indications

I usually save these posts for after market but being the market has been so slow today I decided to take a quick peak and I'm not surprised by what I found.

Here's the definition of market breadth from Investopedia, although it only deals with certain gauges of market breadth.

Definition of 'Market Breadth'

A technique used in technical analysis that attempts to gauge the direction of the overall market by analyzing the number of companies advancing relative to the number declining. Positive market breadth occurs when more companies are moving higher than are moving lower, and it is used to suggest that the bulls are in control of the momentum. Conversely, a disproportional number of declining securities is used to confirm bearish momentum.

Here's what I found.

 The S&P-500 is the comparison symbol and it is always in red, the green line is the particular breadth indicator we are looking at and these are all daily charts. This is the % of all NYSE stocks that are 2 standard deviations above their 40-day price moving average, in other words, stocks with good momentum. Note that before the market declined 17% in late July, we had two nearly identical peaks, good market breadth would have shown the exact same reading at each, bullish breadth would have showed a higher reading at the second peak, that would have suggested a bullish move was about to occur, but that ddn't happen. The percentage of stocks at the first peak was 29 and at the second, almost half of that at 14, this is negative breadth and a warning that something was not right with the market. Being that prices in the S&P are about equal to the late October period, we should see similar breadth, instead it goes from 50% down to a staggering 16%, a huge decline in the percentage of stocks above their 40-day m.a.+ 2 standard deviations, this spells trouble.

 This is just the plain percentage of stocks above their 40-day moving average (no standard deviations). Once again back in July at roughly the same two price peaks, we saw that percentage fall and once again currently, we see that percentage fall, in other words, the market has advanced at this second move (currently) on  much weaker breadth or fewer stocks participating, which means we have a thin market, you can see what happened the last time in July.

 This is the percentage of all NYSE stocks trading 1 standard deviation above their 40 day moving average. n July it declined from about 55% to 45%, right now the decline is from nearly 75% to 47%, so we have 3 metrics all showing the market lacking robust breadth, this is showing a problem in the market.

 Here's the Advance/Decline line for the entire NASDAQ Composite (every stock trading on the NASDAQ network). The advance decline line is created by taking advancing stocks for the day and subtracting declining stocks for the same day, the higher the number the better for the market. Again in July at nearly the same price at the two peaks we saw only a modest decline, but it sent the S&P 17% lower in a matter on a couple of weeks. Now we have an even worse reading, fewer stocks are advancing, more are declining even though we are at similar price levels, again, a thin market with problems.

 This is the same A/D line but this time for the NASDAQ 100, look at the July decline and the current decline, to even be considered a neutral market the green line right now should be equal to where it was when the second white arrow starts. To be bullish, the green line should be well above that same reference point, this is a bearish reading.

And here's the A/D line for the broad Russell 2000, again, a negative sign.

Don't under-estimate breadth, it can tell you when the market s getting ready to make a bull move and it can tell you when the market s unhealthy like now. You can see what even small changes did in July, these are much bigger changes.