Stepping Inside Breakout Breadth April 13

Apr 13, 2016: 1:17 PM CST

The S&P 500 (stock market) broke out of a range to new swing highs today.

What message is Breadth sending as to the health or weakness of the actual price breakout?

Let’s take a look – the message is clear:

For a broader perspective on Daily Chart Breadth, see our prior update this week.

Breadth is a tool we use to look beneath the price action to the internal strength or weakness behind the scenes.

No indicator is perfect, but Breadth measures the number of advancing stocks minus the declining stocks and generally gives a clearer picture than price can do in isolation.

The price may be rising, but how many stocks in the broader market are rising with the price trend?

For a breakout to continue (higher probability), we like to see more stocks advancing (Breadth making new highs) along with new price highs.

Breakouts have a higher probability of failing when price runs ahead of Breadth – or specifically, Breadth divergences (fewer stocks are advancing) when price advances in a potential breakout scenario.

In the chart above we’re seeing the S&P 500 (5-min intraday) plotted against the NYSE Breadth (Advancing Issues minus Declining Issues) on the middle (green) grid.

Beneath that is the NYSE TICK, a more rapid measurement of intraday strength/weakness (Market Internals).

In the selected chart above, both Breadth and TICK spiked to a new high on April 8th when price rallied.

Price has since formed a short-term trading range into the 2,065 level and through the range, both Breadth and TICK deteriorated (formed lower corresponding highs).

However, we saw a price breakout boost the market higher this morning.

What did Breadth and TICK say about it?

Both Market Internal indicators failed to keep pace with the price; in sum, both formed negative divergences.

Does this mean price is absolutely guaranteed to collapse back into the range?  No, but the message from market internals at least gives us pause.

The odds/probabilities favor a decline or failure outcome (at least from Internals) while the alternate thesis or “short-squeeze” breakout would trigger as price “bowls over” or overrides the message from Market Internals.

In sum, be careful here with price outpacing internals.

We’d take more confidence in a breakout succeeding if both TICK and Breadth were joining the price at new indicator highs.

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Corey Rosenbloom, CMT

Afraid to Trade.com

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3 Comments

3 Responses to “Stepping Inside Breakout Breadth April 13”

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