How to Use Breadth to Make Sense of a Hideous Flat Range Market

May 22, 2015: 1:40 PM CST

How in the world do you make any actionable sense at all of this pattern seen below:

Is it a Diamond?  Is it a flat range?  Where are the Trades?  What in the world is going on?!

When markets consolidate into a Sideways Trading Range, it can be difficult to feel confident about any trade set-up due to the lack of action.

However, take a moment to overlay an important Market Internal Indicator – NYSE Breadth – and the picture becomes clearer:

Ahhh that’s better.

We’re still seeing a sideways range in the S&P 500 (@ES Futures here) but we have something to clarify what we’re seeing.

NYSE Breadth measures the number of issues that are positive on the session (right now) minus those negative (declining) on the session.

You may have also heard it called “Advancers and Decliners” and that would be correct.

Let’s start with the three Numbers:

1.  Price (index) Makes a HIGHER HIGH into 2,130 while Breadth clearly makes a lower low.

At the time the index moved up from 2,128 to 2,130, fewer stocks participated (were positive) in the movement.

At the end of May 18th, Breadth registered a value of 400.  Flash-forward to May 19th when the S&P 500 made a new high and this time Breadth read roughly -500.

Price made a new high but breadth collapsed… and later so did price – all the way back to the 2,121 level.

2.  At support, Breadth steadily increases through May 20th AHEAD OF a strong powerful breakout rally.

Breadth strengthened and then slightly later, price strengthened.

3.  As price once again peaked into the 2,130 level, Breadth was strong early on May 21 (+700).

However, as the index stabbed higher into the “spike” high of 2,132, Breadth had fallen all day long.

Once again, price rallied, stabbing at the highs but fewer stocks “stabbed up” with it.

And price collapsed down away from 2,130.

The main idea – in this simple recent example – is that we benefit from comparing PRICE with BREADTH to confirm – or dis-confirm as is the case here – what we’re seeing in price.

When Breadth and Price diverge, a short-term reversal – which is tradable for aggressive, active traders – is likely to follow.

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Corey Rosenbloom, CMT
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1 Comment

One Response to “How to Use Breadth to Make Sense of a Hideous Flat Range Market”

  1. Mpofu Says:

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