Short-term breadth is slightly extended to neutral, while longer term breadth is still presenting a slightly bearish divergence.
Top pane is of course SPY with various moving averages and Bollinger Bands.
Middle pane shows two measures of breadth: The red line shows the number of stocks trading above their 5 day moving averages while the gray histogram shows the number of stocks in an uptrend.
The 2nd pane from the bottom (green line) is a decliners indicator. This indicator is bounded between 0 and 100. Higher readings mean many stocks declined, creating a buy signal. Today’s reading of 50 is perfectly neutral. This indicator is a great short-term indicator.
The bottom pane is the number of stocks making a new 52 week high or low. Note that this indicator is not showing much of a divergence, BUT, it doesn’t get much higher than where it is now, yet the indices are very near recent highs.
Bottom Line:
The breadth picture is slightly bearish to neutral over the short-term while intermediate term breadth is showing a slight bearish divergence.
Looking at the decliners indicator – why does a high number of declining stocks reliably indicate a buying opportunity? Isn’t it indicating that the market is turning/trending down?
Not at all. Over the past 25 years or so, and especially over the last decade mean reversion has been the name of the game. Whenever we see a high number of decliners, we are set up for a short term bounce. Keep in mind that forecasting the short-term, i.e. next day or two or three days out is much easier than forecasting weeks out.
Click on the chart to enlarge and look what happens with the SPY when decliners are high.