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Is Market Breadth Contracting?

Breadth indicators offer an unbiased and broad assessment of the stock market - regardless of what the overall price index is doing. Such information may not be easily detectable by looking at a price chart alone.


Many stock market indexes are market-cap-weighted and are biased by the heaviest market-cap-weighted components. The undue influence does not exist in market breadth indicators. Whether the market rally is broad or narrow-based can determine if the trend is sustainable or short-lived.


By combining market breadth indicators with other technical indicators, an investor can better evaluate the internal health of the marketplace and the next sustainable trend.


Enclosed are updates to the advancing minus declining issues (A-D) or market breadth indicator applied to popular stock market indexes such as SPX, INDU, NYA, COMPQ, NDX, MID, and SML.


In summary, market breadth indicators such as the Advance minus Decline (A-D) line remain one of the better technical indicators to confirm the sustainability of a trend.


Expanding market breadth reflects broad participation in the market, which often leads to a sustainable and longer-lasting uptrend (rally). Narrowed or lack of market participation can also lead to trend reversals and the start of bear trends.


A brief review of the market breadth indicators for INDU, NYA, COMPQ, NDX, MID, and SML shows the respective advance minus decline lines also contracting over the past year. If the above trends continue, this will not bode well for U.S. stocks, suggesting that the narrowed market breaths signal a deeper or more pronounced correction.


For example, the S&P 500 Index price (black dashed line) has historically correlated closely to the SPX advancing issues minus declining issues (A-D) or SPX market breadth (solid black line). When the advance-decline line contracts, it has led to SPX price pullbacks and corrections. When the market breadth line expands, it has produced SPX price rallies.


The SPX A-D line peaked in late Jul 2023, around the same time the SPX price peaked (4,607.07 - 7/27/23).


Also, over the past six months, SPX has developed a head/shoulders top in both the SPX price and the A-D line. The SPX price breakdown below the neckline at 4,328-4,335 on 9/29/23 renders a downside target toward 4,048-4,049 (Apr/May 2023 lows and the 50% retracement from Oct 2022-Jul 2023 rally).


On a positive note, the neckline to the SPX A-D h/s top remains intact. Will a convincing neckline breakdown confirm the recent SPX h/s top price breakdown?


Or will a successful test of neckline support trigger an SPX price recovery?


Source: Chart courtesy of StockCharts.com

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