Short-term breadth continues to expand…Long-term breadth is still stagnant.
Summary:
Short term breadth continues to improve. As I stated several posts ago, we must first see an improvement in short-term breadth before we can expect longer-term breadth to improve.
For longer-term breadth, I use the gray histogram in the top pane. This is a measure of stocks in an uptrend. In order to understand how short-term breadth gains lead to longer-term breadth gains, imagine the relationship between the 5 day moving average and an uptrend. Before a stock can be in an uptrend, it must first regain the 5 dma. Once it regains it and trades above it, some oscillation can certainly occur, but as long as it does not spend a significant amount of time beneath the 5 dma, eventually the stock will begin making what most people would consider to be an upward sloping trajectory.
Right now we have 3000+ stocks trading above their 5 dma. This is unsustainable, but good, nonetheless. What we are looking for is that some of these 3000+ stocks firm up and over the next week or so begin making it to the Stocks in an Uptrend count.
We also want to see some marked improvement in 52 Week New Highs and New Lows. As you might imagine, this is a similar measure as Stocks in an Uptrend because if a stock makes a new high for the year, it is hard for it NOT to be in an uptrend.
Over the short-term, I am looking for weakness, perhaps for the next few days. What we want to see is the rally continue after a short pullback. The point is that if the rally doesn’t continue, there will not be any improvement to our longer-term breadth. With a market trading beneath the 200 dma and no longer-term breadth to support an advance, shorting or cash is still the way to go.
The Breadth Report is currently 25% long and 25% short.
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.
