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Improving Market Breadth

There are a lot of market breadth indicators including the popular advancing issues minus declining issues, tick indicator, new highs/new lows, % of stocks trading above the moving averages, and many others. Although market breadth technical indicators are not the holy grail of technical indicators, these technical indicators deployed in concert with other indicators/metrics remain important tools for investors and traders.


Why are market breadth indicators important?


Breadth indicators give a broad picture of the market and can offer a view of the internal health of the market in question regardless of what the overall price index is doing. This is often needed to determine whether a market rally is broad-based and sustainable or narrowed-based and short-lived. By utilizing market breadth indicators in conjunction with other technical indicators/metrics you can uncover the overall weaknesses or strengths of the price actions. Such detailed information may not be easily detectable simply by watching a price chart alone.


With the above thoughts in mind, are the charts of the advancing minus declining issues market breadth indicator (A/D) on key US stock market indexes including SPX, INDU, NYA, COMPQ, NDX, MID, and SML.


S&P 500 Index (SPX):


S&P 500 Index price (black dash line) has correlated closely to its Advancing minus Declining breadth indicator (black solid line). When SPX Advance/Decline corrects it has led to an SPX price correction. When the market breadth indicator expands it also has led to an SPX rally. The SPX A/D market breadth contraction from 2/14/20-3/23/20 (6,450 to 6,057) triggered the recent Feb-Mar 2020 -35.51% SPX decline. The ability of SPX AD to rally from the Mar 2020 bottom via a series of higher-low has also led to a series of higher-lows in the SPX price trend. The SPX A/D (6,425.30) is close to breaking out of its Feb/Jun 2020 highs (6,450.31/6,406.60). A major A/D breakout suggests a retest of SPX 2/19/20 all-time high (3,393.52).


Dow Jones Industrial Average (INDU):


INDU A/D line is trading above its 200-day ma. It has also traded above its Jun 2020 high and its Feb 2020 downtrend. This technical breakout suggests expanding the market breadth and renders a retest of the Feb 2020 high.


New York Composite Index (NYA):


NYA A/D line has been consolidating over the past month via a tight trading range. This is constructive as the listed market nears a major technical breakout above the Feb/Jun 2020 highs.


NASDAQ Composite Index (COMPQ):


COMPQ A/D line has been consolidating over the past month. A convincing move above the Feb 2020 downtrend confirms a technical breakout signaling the broader market breadth in the over-the-counter market.


NDX 100 Index (NDX):


NDX A/D continues with its strong market breadth as evidenced by new all-time highs above its Feb/Jun 2020 highs. The new market breadth highs also confirm the new all-time price highs in NDX price. This leadership market is likely headed toward the top of its 2-year uptrend channel.


S&P 500 Mid-cap Index (MID):


MID A/D is still consolidating just below its Feb/Jun 2020 highs. A potentially bullish triangle pattern has developed. A convincing breakout above the top of its range would confirm expanding market breadth.


S&P 500 Small-cap Index (SML):


SML A/D remains one of the weaker indexes as has yet to convincingly clear above its 200-day. Nonetheless, if SML A/D can breakout out of its 7-month triangle than this can lead to the expansion of market breadth.


In summary, market breadth is one of the better technical indicators to evaluate the sustainability of a trend. Expanding market breadth reflects broad participation in the market in question. This has historically led to a sustainable or longer-lasting uptrend. For the most part, the market breadth indicators for major US equity markets are technically constructive. Many of the A/D lines are nearing their respective technical breakouts. We suspect confirmed A/D breakouts can lead to the respective US equities also retesting their all-time price highs.


Source: Courtesy of StockCharts.com

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