Thursday’s Breadth Report

Breadth expansion slowed today but showed no real divergence from price.

The raw advancers – decliners measure is giving another buy signal as the decliners line (red) has closed above the upper Bollinger Band (purple). We are currently long already from the same signal 3 days prior, but the signal is valid, nonetheless.

The 52 week new highs new lows indicator pulled back today. This type of pullback is an anecdotal precursor to a more significant pullback in price.

As breadth expansion has slowed with all measures near their historical high ranges, I am considering initiating a small short position on the open. This may be early, and breadth is not showing any major divergences from price.

Philip Morris International Inc. [[PM]] met our profit target today, but admittedly, the target was set too low.

The rest of the picks from yesterday are still valid.

We have one new pick for tomorrow, and that is The Blackstone Group L.P. [[BX]] .

The exit target is $17.11

First, let me direct you to an excellent new piece by Mr. Jeff Pietch, The  Gambler’s Fallacy, where he details the statistical improbabilities of 14 successive up days. Plus, there are a few more goodies in his article.

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For the most part, breadth expanded while price rose. There are some very mild divergences developing.

Mild divergences are developing with the number of stocks in an uptrend (4th pane from the bottom). Looking at the gray histogram, we see that although price is making a new high, our number of stocks in an uptrend is not. A similar divergence is developing in the same pane with the red line, which represents the number of stocks trading above their 5 day moving averages.

The raw advancers/decliners (2nd pane from the bottom) is showing a very small divergence as there were fewer advancers today and more decliners. This means we did not close out our trade that we opened yesterday based upon the buy signal this measure generated.

Finally, the 52 week new high – new low indicator (bottom pane) shows a surge in new highs, but it has not surpassed the reading in October.

All in all, these are very very mild divergences and are certainly nothing that we would make me want to open a large short position.

Both previous CwH picks broke out and have met their target prices.

The screen has been yielding no picks for a couple weeks, but tonight’s picks have made up for that. I say that because visually, these charts are hot. Visual appeal may not translate into guaranteed profits, but if you have looked at lots of charts, you can see that these issues look primed to move.

Crown Holdings, Inc. [[CCK]] Profit target at $29.21

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Hawaiian Holdings, Inc. [[HA]] Profit target at $8.87

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Philip Morris International Inc. [[PM]] Profit target of $51.55 (This target price is too low. Perhaps $55 is better.)

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Stewart Information Services Corporation [[STC]] Profit target of $14.90

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May your breakouts be many and often!

The market continues to climb, and breadth continues to expand.

Tonight we’ll examine the very bottom pane, which is a simple measure of new 52 week highs and lows.

This measure is calculated from a broad universe of stocks. The only stocks that are excluded from this universe are OTCBB. There is no price, volume, or liquidity requirement. Tonight we see that 1,048 stocks made a new 52 week high, while 73 made a new 52 week low.

The buy signal on this measure of breadth is generated on the first close where there are more new lows than new highs. Obviously, we are a long way from a buy signal right now..

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We almost have a sell signal generated today from yesterday’s raw advancers/decliners buy signal. If tomorrow closes up, the position will be sold at the close.

Overall, there are no apparent negative divergences in tonight’s report. Breadth continues to expand while price climbs.

3 of 4 measures are overbought, with 1 measure giving a new buy signal.

The raw advancers/decliners measure (2nd pane from the bottom) is giving a buy signal. The universe that generated the advancers and decliners are stocks trading over 100K volume and over $1,000,000 in liquidity on average over the last 50 days (3,245 stocks, from “Universe”, fourth pane from the bottom).

This signal is generated when the decliners exceed the upper (purple) Bollinger Band. The trade is closed when the decliners close beneath the lower Bollinger Band. The thinking behind this (nothing Earth-shattering) is that when decliners rise high enough fast enough, it must be time for advancers to take over again.

Buying the open and selling the close, with no commissions and using all data available yields the following stats on the SPY and QQQQ (it also does well on IWM):

————SPY          QQQQ

CAGR:      11.28%    15.39%

Win%:       67.95%   65.35%

PF:             1.54          1.54

Sharpe:    1.23          1.05

MaxDD: -26.60%   -36.44%

Trades:    443           303

These trades last 1 week on average.

Remember that these setups are based on breadth only, and not on price action. I will detail the other measures in the near future, and then put together a brief summary for each measure for quick reference.

I had some minor elective surgery last week and have spent the last four days recovering. With nothing to do except stay in bed, I had time to work on a new project. This project was to build some indicators that use only market breadth to operate- no price action– to time or make trades on one of the index ETFs, such as [[SPY]] . The overall goal was to have a measure of breadth that I could post nightly on the blog with the only requirement being that each measure had to have an edge.

Click on image to enlarge…

The top pane is course a graph of the SPY.

The second pane calculates all stocks with a 50 day average volume greater than 100K and a 50 day average liquidity of greater than $1,000,000. It lists these as the “Universe” in blue. We can see that as of Friday there were 3,228 stocks that met this basic criteria. We then use this universe to measure the stocks in a uptrend (proprietary measure, shown by the gray histogram). On the right side of that pane we see in gray that there are 1,592 stocks in an uptrend. The second measure (the red line) calculates the number of stocks above their 5 day simple moving average. We can see that there are currently 2,102 stocks (out of our universe) that are trading above their 5 day simple moving averages.

I put the vertical line in to show how all the measures lined up to have you buy the bottom on 2/5/2010.

The other 3 panes need explanation as well, and a more detailed explanation will be forthcoming. Briefly, the 3 lower panes measure

1. The cumulative Advance/Decline line of all stocks in the universe as described above
2. A raw measure of advancers and decliners, with Bollinger Bands built from the decliners data.
3. A measure of new highs and new lows with a 9 day simple moving average.

In the future I will cover what the specific buy/sell signals are for each of the measures, and with that we’ll look at how they performed under backtesting.

Currently, all the measures of breadth are saying that the market is overbought.

Back to bed…