Breadth Analysis

Typically I save breadth analysis for longer term perspectives, it was very helpful in figuring out the top and shorting in to strength from March to May 1 of this year and was helpful in gauging just how much trouble this market is in on a primary trend basis, but I don't think we are quite ready to deal with the primary trend quite yet. As you know, my near term expectations are for a short term pullback, which could still be quite intense as the 15 min 3C charts in several of the averages are already in a bad place. The support trendline of the SPX's large bear flag would make for an ideal head fake/shakeout area to propel us in to a new sub-intermediate uptrend heading toward the top of the bear flag and once again, the resistance trendline in that area would make for an excellent head fake move as traders still live by the old rules. After that (keeping in mind the market is dynamic and fluid), I expect the primary trend to re-assert itself unless we get some sort of intervention and on that front we are watching the underlying action in gold closely as it seems to be the best QE sentiment indicator right now with commodities coming in a close second. At some point the R2K will also be a key index to watch. So that's where our near term, sub-intermediate and primary trend expectations are as of now, of course subject to change should we get strong evidence suggesting otherwise.

The breadth charts for the purpose of near term move are an imperfect tool, but they do seem to be on board with what we are seeing in the risk asset layout; credit, rates, currencies, etc. and along the lines of the different 3C trends that are in play right now. I will get to a "big picture" breadth post soon, probably as we approach the re-emergence of the primary trend.

Here we go with breadth indicators, these are all Worden T2 series indicators in green with the comparison symbol in red being the S&P-500 unless otherwise noted.

 13 Week New High/Low Ratio- In March I'm simply pointing out the negative divergence in the green indicator vs the SPX. Two things are apparent on this chart, 1) we have a strong reading in the indicator which argues for the sub-intermediate up trend that we have been in and that it is not over, in my opinion it will end with a short squeeze that will be quite obvious to all. I also expect to see distribution in to such a move, making that a perfect area to initiate or add to core short positions for the primary trend. The second thing that is less noticeable, but still in line with our 3 trend assumptions is the fact that the SPX has recently made  higher high (red line) whereas the indicator has failed to make a similar higher high, this argues for what I believe the next trend will be, the pullback move (which is a short term trend when compared to the sub-intermediate trend). Normally I'd say 5 days or so, but we have so much volatility and chop, you can probably double that and it won't be a clean, obvious pullback, there will be the games that frustrate traders.

 The 26 week version of the same indicator is giving us the same 2 confirmations of both the sub-intermediate trend and the short term pullback as again, the indicator has failed to make a new higher high with the SPX, but remains quit elevated vs trade from the March to early April period.

The 4 week version also shows the same and thus we have pretty good confirmation that the probabilities argue for a pullback which could be quite intense a I have shown you, the 2 week ATR or Average True Range has about doubled over the last month or so, meaning intraday ranges are about twice as wide as they were a month or so back and that was a volatile time. Of course the first trend we are concerned with is the pullback move and we see the indicator has failed again to make a higher high with the SPX.

Just looking at the daily version, the same thing is apparent, the SPX made the higher high, the indicator did not, a negative divergence on 4 versions over several different timeframes. Nothing is for sure until it's already done and there's no money in watching what is done, so we look to probabilities, 4 versions of the indicator all confirm, that's pretty good probabilities. This also gives us a chance to set up some longer term positions and trades, something we haven't had a good opportunity to do since June 6th.

 This is the Percentage of NYSE Stocks trading above their 40 day simple moving average, to the right you can see the percentage which is currently at 76.31% of all NYSE stocks trading above the 40 s.m.a. (indicator is still green, the SPX is red). Again we have two trends this chart depicts, strength in the sub-intermediate uptrend and not much to suggest that the strength won't continue and probably crescendo with a short squeeze. The second is the shorter term, more immediate trend, the pullback. Again you can see here that the SPX has made a higher high, the % of stocks > 40 sma has failed to do so, this points to recent loss of momentum and opens the door to our pullback.

 This indicator is similar, except it is the Percentage of NYSE stocks trading One Standard Deviation above the 40 day s.m.a., these are higher momentum stocks, again both the recent strength vs the March-May 1 period and the very recent weakness in failing to make  higher high with the SPX is evident.

 This is the same indicator, except instead of 1 standard deviation above the 40 day sma, this is two standard deviations, these are the high flier momentum stocks, here it is VERY clear that the near term is showing weakness in breadth and a pullback again is the highest probability among all 3 versions of this indicator.

 This one is a bit different, this is the Percentage of NYSE Stocks trading 2 Standard deviations BELOW the 200 day moving average, these are the VERY WEAK stocks. As the SPX makes a higher high, we would expect this indicator to make a lower low, it doesn't. Now we have another 4 breadth indicators giving us high probabilities with regard to both the sub-intermediate uptrend continuing , but that we are most likely going to se a decent pullback before that trend continues higher in to a short squeeze move. In fact, we need a deep correction and perhaps even a break below the bear flag to draw shorts back in to the market with confidence as the last month has been a meat grinder, the market needs the momentum of their covering to get the sub-intermdiate trend moving up strongly again.

 Here we have the Cumulative Volume Index vs the SPX (still red); again the indicator fails to make a higher high with the SPX, in fact the SPX also made a higher low (the definition of an uptrend-higher lows and higher highs), the indicator didn't even make a higher low, so short term momentum is failing and opening the market up to the pullback we have been seeing develop on the 3C charts.

 The McClellan Oscillator-there are many different ways to use this indicator, I prefer to use it as a divergence/confirmation indicator. Once again it shows us recent trend strength rivaling the 2012 top, but short term it shows us a complete failure to make a higher high, in fact it has made  lower low and the deepest one of the uptrend from the June bottom. Note the red trendline I drew on the SPX connecting the lows in an uptrend, I can't do the same with the MCO and thus we have ANOTHER confirmation, thus increasing our probabilities.

 Here we have the Advance/Decline line for the NASDAQ 100, in red we have the NASDAQ 100 making a higher high the A/D line ha failed to even come close to a higher high, it' also made a lower low so once again, short term probabilities point toward weakness in the near term, this is why I have been opening short term trades like FAZ or Calls in UVXY.

 To give you some perspective of what the Primary trend looks like, here's a longer chart of the Advance/Decline line for the entire NASDAQ Composite. Note prices are higher now than they were at the 2011 top that lead to a 20+% drop in August, yet the A/D line is substantially lower. When the primary trend re-asserts itself, this market will be very ugly, of course we can't account for Central Bank easing, but on the other side of the coin, we don't even know if QE3 would be effective like 1 and 2 were, the fundamentals on the ground and especially in Europe and China are much different now than they were then, even Bernie himself admitted this in his semi-annual Congressional testimony.

Our immediate concerns though are with the next trend or trends to appear, here we see the same A/D line up close and again the A/D for the NASDAQ Composite is lagging the Composite itself.

I haven't cherry picked charts here, I just posted what was there. We have 12 breadth charts, numerous leading indicators on are Risk Asset layout and numerous 3C charts all pointing at a pullback substantial enough that I opened a few trades without any leverage. Most of the charts seen above also give pretty good evidence that the sub-intermediate uptrend is not done. This gives us a strategic view, 3C should give us the tactical openings to enter some good trades, we need some movement in the market to enter some longer term trades. We have done pretty well mixing it up in this choppy market using leverage (options) for quick hit and run trades, but I prefer not to use leverage if I don't need it and I believe both of these trends are not only likely, but can be traded with or without leverage.

Just remember what you have seen, the market is there to move you emotionally and make bad decisions with its volatility and extreme moves, understand that is the game, be patient, let the trade come to you and use this to your advantage rather than be beaten by it.

I look forward to getting the Op-Ex. pin out of the way so we can see some movement in the market.

I'll see you in a few hours.