Huge New High, Can We Go Higher?

Today’s high on $SPY is something like a 1000 day new high. These type of events are bullish, as I’ve written about numerous times. I also warned about getting bearish during an abnormally bullish market. I finished that July 30th post with this thought:

It is not a market that we want to aggressively short. We may also not want to be aggressively long. The results show we may have a few weeks to consider our positioning and bias.

The bottom line is that I am looking for the market to trend more than swing. Since the June 4th low, we’ve seen fairly predictable swings. These results suggest that the swings may be less predictable and the market may shrug off bad news as it climbs the wall of worry.

Since market performance has been consistent with my expectations, what I want to examine tonight is whether it can continue for a while without a pullback or correction. For that examination, I will use some breadth indicators.

Let’s start with a graph of the percentage of stocks above their 20, 50, and 200 day moving averages. For the most part, I only focus on the percentage above the 20 day average.

We are looking at the green line in the bottom pane. Since the bottom in 2009, larger pullbacks and corrections have typically occurred when this line gets near to or above 80. It closed tonight at 71.32. That doesn’t mean we won’t pullback here. It just means that any pullback will tend to be shallow until we get nearer to 80. One caveat is that before the 2008 Armageddon and subsequent March 2009 bottom, larger pullbacks and corrections tended to occur nearer to 70. I’m still of the mind that the crash changed the character of the markets. Therefore, I’m comfortable using 80.

The second measure of breadth to examine is the number of stocks trading above their 5 day moving averages and the percent rank of the number of decliners. Since the chart is covering more than 3 years, it gets a little hard to read, but I think it still makes the point. You can click on it to enlarge it.

As one might expect after such a big day, the percent rank of the number of decliners (green line, bottom pane) is very, very low. After such a low reading, I expect the next day to produce a doji that closes near the top of today’s candle, or a slightly lower close.

The red line is the number of stocks trading above their 5 day moving averages. It closed at 2606. I like to use 2500 as an area of caution. This tells me the market is susceptible to experiencing a shallow pullback that may last a few days.

Both of these readings can go in the other direction after just a few days of consolidation, allowing the market to go higher without much of a pullback.

My best guess, using these indicators? The market consolidates, pulls back slightly, less than 2%, and then continues the up trend. I will start looking for a more meaningful correction if the percentage of stocks trading above their 20 day moving averages gets closer to 80.

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