Market breadth is a crucial technical indicator as it measures the number of stocks advancing relative to declining. When fewer stocks are rising, this suggests narrowed market breadth. When more stocks are rising, this indicates wider market breadth.
Investors tend to use market breadth indicators to assess the overall health of the marketplace. A market is healthy when market breadth expands or more stocks advance than declining. Market breadth analysis can provide early signs of the sustainability of rallies and declines.
While market breadth has been poor for the better part of the year, the good news is that it has dramatically improved, as evidenced by sharp jumps in popular breadth indicators such as advance minus decline line (A/D), the percentage of stocks trading above the 50-day ma, the percentage of stocks trading above the 200-day ma, and the number of SPX stocks trading above the 50-day and 200-day moving averages.
Before the summer, the seven largest tech companies by market capitalization (i.e., AAPL, MSFT, GOOG/GOOGL, AMZN, NVDA, META, and TSLA) were responsible for the bulk of the SPX 2023 gains. S&P Technology and Communication Services sectors collectively accounted for 70% of SPX's first-half gains.
With less than two months before the end of the year, market breadth has suddenly expanded.
Below are updates to popular technical indicators:
Volume analysis: Eight of the last ten trading days show positive volume, signaling investors returning to stocks.
The Advance minus Decline indicator: The Advance-Decline line nears the top of its Jul 2023 downtrend channel. A market breadth breakout confirms the October 2023 bottom and bodes well for SPX price recovery into year-end and early 2024.
Overbought/Oversold indicator: The RSI indicator (68.28) has broken out of its Aug 2023 downtrend channel as it retests overbought levels (70s). During Jun/July 2023, the RSI indicator traded into the mid-to-high 70s before peaking.
Price momentum indicator: The MACD price momentum indicator has reversed direction as the indicator nears the Jun/Jul 2023 highs. A retest of the Jun/Jul 2023 highs would imply SPX trading near 4,607.07 (Jul 2023 reaction high).
% of SPX stocks trading above its 200-day ma (52) indicator: The longer-term breadth indicator has also improved from the Oct 2023 low (24.40), doubling in the past month. The Jul 2023 downtrend breakout hints at a retest of the Jun/Jul 2023 highs.
% of SPX stocks trading above its 50-day ma (70) indicator: The medium-term breadth indicator has soared over the past month from a low of 10% (Oct 2023). Will a breakout lead to a retest of the Jul 2023 highs (90)?
SPX Implied Volatility Index (VIX – 14.18): After breaking out of its Mar 2023 downtrend, the VIX Index (14.18) has reversed sharply lower toward a retest of Jun/Jul 2023 lows (12.5-13). A breakdown can lead to an explosive SPX price rally. On the other hand, finding support at 12.5-13 can lead to a VIX rally and a near-term pullback in the SPX index.
The number of SPX stocks trading above the 50-day and 200-day moving averages has jumped to 224 SPX stocks or approaching the halfway mark. Above 50% confirms market breadth expansion and a sustainable SPX rally.
SPX price analysis: SPX has reversed its Jul 2023 downtrend channel via the 11/14/23 gap-up breakout (4,422-4,459). A breakout is technically constructive and suggests the next SPX rally toward 4,521-4,567.5 (9/1/23 negative outside day high and 8/2/23 gap-down) and above 4,607-4,637 (Mar 2022 high and 7/27/23 negative-outside day reaction high), 4,721-4,744 (Jul 2023 channel breakout projection and Nov 2021 high), and 4,818.62 (1/4/22 all-time high).
An overbought condition has developed from the 10/27/23 rally. A failure to clear above initial resistance at 4,541-4,567.5 warns of a near-term pullback toward initial support at 4,410-4,459 (11/14/23 gap-up and extension of the Jul 2023 downtrend channel breakout). The secondary support is 4,393.5 (Oct 2023 high) and 4,320-4,337 (11/3/23 gap-up, extension of the Jun 2023 neckline, and the 50-day ma). A violation warns of a decline toward 4,245.5-4,263 (11/2/23 gap-up and 200-day ma) and below 4,195.5-4,216.5 (10/3/23 low and May 2023 breakout), and 4,099-4,104 (Oct 2023 reaction low and the bottom of the Jul 2023 downtrend channel). A breakdown signals the resumption of the Jul 2023 downtrend.
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