What Breadth Reveals about a Possible Market Reversal

Oct 2, 2014: 10:29 AM CST

When assessing the probability of a retracement (meaning the trend will continue) or larger reversal (meaning we’ll see a steep retracement or possible trend reversal), it’s often helpful to look at Market Breadth and other internals.

Let’s update our Market Breadth Charts for the entirety of 2014 and note a clear warning sign from NYSE Breadth.

We’re seeing the S&P 500 and NYSE Breadth ($ADD) charted throughout 2014.

Note the Breadth High (+2,311) in March – the indicator never reached that peak throughout the remainder of 2014 (so far) despite the index rallying rather consistently.

There have been two interim breadth highs as noted in July and August but those values peaked near the +2,000 level (+2,012 and +2,045).

Breadth refers to the number of issues (or stocks) trading positive during the day minus those trading down.  The NYSE Breadth reading encompasses more names than the S&P 500 index, though you can also view the Breadth readings of the NASDAQ, Russell 2000, S&P 500 and even the Dow (how many of the Dow Jones 30 stocks are positive minus those negative on a particular session).

We look at Breadth to give us a clue of aggregate money flow and fund activity – spikes in breadth represent underlying strength or weakness. 

We can also view trends or patterns of Breadth like the declining pattern I highlighted from August to present.

The chart below compares the “Trend” or steady pattern of Breadth through 2014:

What’s the general pattern and message?

Breadth was strong and strengthening (rising highs, lows, and midpoint) at the beginning of 2014 and then stabilized throughout the middle portion.

However, we’re currently seeing a “stealth” or secret deterioration of Breadth ahead of the “Bull Trap” and reversal down against the 2,020 index level.

IN other words, Breadth (participation of stocks in the index) is deteriorating steadily and price may yet follow.

For now, let’s continue to be cautious and closely follow additional Market Internals for signs of firming (strengthening/positive divergences) or else continued deterioration along with a steep price retracement or short-term reversal.

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Corey Rosenbloom, CMT
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