Tuesday’s Breadth Report, Caution Edition- 2 More Closed Trades

Breadth expanded ever so slightly today, matching price. With no significant expansion in breadth and price beneath the 50 day average, caution is in order.

Summary:

Yesterday afternoon the Raw Advancers and Decliners indicator closed a trade and this afternoon the 5 Day Moving Average indicator and the Advance-Decline Line indicator both closed trades. The tracking spreadsheet for these 3 indicators is below. The 52 Week New High New Low indicator is still long [[SPY]] .

Raw Advancers and Decliners Indicator:

Number of Stocks Trading of Their 5 Day Moving Average Indicator:

Advance/Decline Line Indicator:

Be Cautious Here:

The Number of Stocks Trading Above Their 5 Day Moving Average indicator (red, top pane) is near levels which typically have been followed by some weakening. The difference between now and the previous several months is that now we have had a significant sell-off on high volume which has left us beneath the 50 day moving average. Further weakening here will see us close the large gap and possibly re-test the 200 day moving average. Note that the number of stocks in an uptrend (gray, top pane) is consistent with levels that occur during a sustained pullback or correction.

To be clear, breadth does not currently seem strong enough, in my humble opinion, to support a sustained move higher. Possibly we will see small, incremental moves higher, but I doubt it. I find a gap-fill and re-test more probable.

Be aware that the 200 day average is fast approaching. A close beneath the 200 day will halt long signals of some of these indicators. If we begin trading beneath the 200 day average, I will quickly switch over to a short mentality and you will begin seeing more blog posts with short setups. As long as we can trade above the 200 day average but beneath the 50 day, it pays to be cautious. How you choose to trade cautiously is up to you, but it may be as simple as lowering your position sizes and keeping more cash in your account.

How To Read the Breadth Report

Universe Screen: Applies to top three indicators. Does not apply to 52 week new highs and lows.

• The universe contains any stock trading on average more than 100,000 shares per day with a liquidity of  at least $1,000,000  per day, over the last 50 days.

1. Top most indicator is the measure of stocks in an uptrend (gray histogram) and the number of stocks trading above their 5 day simple moving averages (red line).

• Buy signal is generated for the open when the SPX is above its 200dsma and the red line crosses beneath 700.
• Sell signal is generated for the close when the red line crosses above 2500, or the trade is held for 25 days.
• Short signal is generated for the open when the SPX is trading beneath its 200dsma and the red line crosses above 2500.
• Cover signal is generated for the close when the red line crosses beneath 700, or the trade is held 25 days.
• Long trade lasts on average 24 days while short sell lasts on average 10 days.

2. The 2nd indicator is the Advance-Decline line (blue line) with a 50dsma plotted (gray line). My calculation is similar but not the same as Investopedia’s.

• Buy signal is generated for the next open when the SPX is above its 200dsma and the A-D line crosses beneath the 50 day average.
• Sell signal is generated for the close when the A-D line crosses back above the 50 day average.
• The average trade lasts about 15 days.

3. The 3rd indicator is the raw advancers and decliners, with the advancers being the green line and the decliners being the red line. There are also Bollinger Bands (purple) set 1 standard deviation beyond the 20 day average of decliners.

• Buy signal is generated for the next open after the decliners exceed the upper Bollinger Band.
• Sell signal is generated for the close when the decliners close beneath the lower Bollinger Band.
• The average trade lasts 5 days.

4. The bottom indicator is the measure of 52 week new highs new lows (histogram), with a 9dsma (yellow line) plotted over top.

• Buy signal is generated for the next open after the number of new lows exceeds the number of new highs.
• Sell signal is generated for the close when the number of new highs surpass the 9dsma.
• The average trade lasts 3 days.

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