As we start December and eventually wind down 2013, let’s take a longer term look at Breadth and what it’s suggesting about the strong rally in motion.
We’ll start with a longer-term picture from the start of the 2009 Bull Market to the present peak(s):
We see the Dow Jones Industrial Average (top) and a special ’smoothed’ Breadth Indicator which is the 40 day Simple Moving Average (SMA) of NYSE Breadth (Advancing Issues minus Declining Issues).
Technically I’m averaging the intraday high, low, and close to calculate the line which gives a better representation of the daily activity than the simple end-of-day close of Breadth.
Not surprisingly, Breadth (the average) was strongest at the start or “Kick-off” of the 2009 Bull Market Rally and has since declined (formed lower average highs) as the rally progressed over the last four years.
The two highest points in the composite average were the April 2010 peak and then the March 2012 peak.
The three lowest points in the composite average occurred in mid-2012, September 2011, then May 2012.
With respect to 2013, we can see that the Breadth Average has declined with each successive new peak:
I zoomed-in the chart (same parameters) to highlight the 2012 to present period which shows the rally and retracement phases.
Note the small divergences in the Breadth average in conjunction with short-term turning/reversal points in the index.
Breadth warns of caution and reduced participation relative to the prior peaks (at lower prices in the index).
It’s a warning sign but not necessarily a “sell stocks” sign, at least not in a market being fueled by ongoing stimulus into an end-of-year bullish historical seasonality (stocks tend to rise into the end of the year).
Continue watching Breadth itself along with indicators such as this one which averages a Market Internal Indicator over time.
Follow along with members of the Daily Commentary and Idealized Trades summaries for real-time updates and additional trade planning parameters as we watch a “hold and bounce” or “break and retrace” scenario play out in the near future.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade