Breadth Market Nasdaq

Here’s how looking at the breadth of the market can give you clues to future price action.  First, what is market breadth?

Market breadth is simply looking at advancing stocks compared to declining stocks.  In a strong advancing stock market, the number of advancing stocks will move towards an extreme high and the number of declining stocks will move towards an extreme low.

There are a number of ways you can (and should) look at this data.

1) On it’s own.

Simply look at a chart of advancing stocks.  You will see how this number oscillates higher and lower with price action.  Same thing can be done with decliners.  Here’s a chart of recent action with the Nasdaq Advancing Stocks:

Nasdaq Advancing Stocks

Note that this chart shows a daily, 3 day and 5 day moving average of Nasdaq Advancing Stocks.  You can observe peaks and troughs in various time frames and make decisions based on them.  Obviously this is only 1 tool.  But it helps – a lot.

2) Advancing Stocks – Declining Stocks

This is a simple calculation – and here’s what you get:

Nasdaq Advancing Stocks Minus Declining Stocks

Now this chart shows a 5 day moving average and a 13 day moving average.  The reason you add longer term moving averages is to get a bigger picture on the longer term potential of the stock market.

As you can see, these are two valuable tools in timing the stock market.  But there’s more:

3) The Ratio of Advancing Stocks – Declining Stocks

Nadaq Advancing Declining Stock Ratio

This chart looks at an even longer term time frame (21 days) and a 13 day moving average.  The reason you do this is the short term data can be quite volatile and not tell you much.

And finally, a chart I featured in my article this morning and the 4th way to look at advancing and declining stocks (breadth market):

4) Cumulative Market Breadth

Cumulative Nasdaq Market Breadth

This looks at even longer term moving averages (venturing into the 24 period moving average).  The key here is looking at market ‘health’.  As you can see well before the market collapse in 2008, the Nasdaq market was breaking down.

Current interpretation?

The key to any indicator is level and direction.  The second key to understand is that price action rules everything.  So inasmuch as the stock market internals were breaking down, the market was moving higher.  But vulnerable.  So where are we now (4/4)?  Well, I’ve been calling for a top in the market around this period and a larger move lower into May for a 9 month cycle low.

However, this has been a liquidity fueled rally.  And liquidity rallies can run higher and longer than anyone can predict.  So if the market pauses here and doesn’t sell off, we could be in for a May top – and I’d trade it accordingly.  Remember, one day can change everything – so reading and trading the market isn’t something you do when you want.  You have to do it all the time to be there for the best opportunities.

As they say on the pit floor on the S&P futures exchange – “To be here for the good times, you have to be here all the time…”

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