Breadth came off its worst levels, expanding slightly.
A longer term look at how our current breadth environment compares to the past.
As expected, we got a bounce and breadth came off of its worst levels of the year. However, looking at the longer-term chart above, we can see that if breadth does not soon start to improve, it will likely mean that this correction is indeed the start of a new and likely sustained move downward.
At the very least, the red line showing the number of stocks trading above their 5 day simple moving averages needs to start moving back up. This can happen very quickly. In turn, this will pull up the 52 Week New Highs and reduce the number of 52 Week New Lows. Should these measures not show improvement, or at the very least, stabilization, we could be in for another lengthy swoon.
In terms of trading individual stocks, there is nothing about the Breadth Report to suggest that strength and bounces should not be sold into. There is not any breadth strength to support bounces in stocks. It is best to continue to stay in cash or pick select shorts at this point in time.
Overall, breadth remains extended in an area that has in the past led to stabilization. But it doesn’t always stabilize, as we saw at the end of 2008.
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.
