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Market Breadth Technical Indicators

Most major indices such as the S&P 500 Index, NYSE Composite, and Nasdaq Composite are capitalization-weighted indexes. Capitalization weighted indexes are driven by their largest components. After a long and extensive bull rally market breadth indicators can show deterioration or divergence while price-based technical indicators can continue to move higher driven by the largest market-cap-weighted leadership names. Conversely, after a sharp market decline, the largest cap-weighted names can exert undue influence on the downside. However, the market breadth indicators may be the difference between an oversold rally that fades or a rally that can lead to the resumption of the primary uptrend.


The question then becomes how do you determine the extent and the magnitude of a stock market rally. This is where market breadth indicators can be reliable in helping investors and traders to uncover market internals. That is if most of the securities in the indicator are advancing as compared to declining or if more stocks are trading above their key moving averages than below their key moving averages then this indicates a recovery and possibly the start of the next major bull rally.


There are hundreds of market breadth indicators including 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 can be an important tool for investors and traders.


Breadth indicators give the user a broader picture of the market and quantify 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 broader-based and sustainable or is narrowed-based and short-lived. By utilizing market breadth indicators in conjunction with other technical indicators/metrics you can better 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 two popular market breadth indicators – advancing minus declining issues indicator and the percentage of stocks trading above the 200-day moving averages indicator applied against key US stock market indexes (i.e., SPX, INDU, NYA, COMPQ, NDX, MID, and SML).


SPX Advancing Issues minus Declining Issues Indicator (A/D)


S&P 500 Index price (black dash line) has correlated closely to its Advancing minus Declining breadth indicator (black solid line). When market breadth (Advance/Decline line) corrects it translates to an SPX price correction. When market breadth expands it also leads to an SPX rally. SPX market breadth contraction from 2/14/20-3/23/20 (6,450 to 6,057) triggered a -35.51% SPX bear decline. The ability to rally via a higher-low market breadth pattern (6,057 - 3/23/20, 6,110 - 4/21/20 and 6,138 - 5/13/20) has led to higher-lows in SPX price trend (2,237 - 3/23/20, 2,447.5 - 4/1/20, 2,737 - 4/21/20, and 5/14/20 - 2,820). On another note, the ability of A/D line to maintain above its 200-day ma (6,149) and its 50-day ma (6,167) hints of retesting the 2/14/20 A/D high (6,450). Does this imply SPX will retest its 2/19/20 all-time high (3,393.52)?


% of SPX Stocks Trading above the 200-day ma Indicator (DMA)


S&P 500 Index price (black dash line - 3,055.73) has moved in sympathy with another key market breadth indicator, % of SPX stocks trading above its 200-day ma (black solid line - 44.49%) indicator. In the past, when the % of SPX stocks trading above its 200-day ma indicator declines it has led to SPX price corrections. On the other hand, when the indicator rallies it has led to SPX rallies. The decline in the indicator from 2/12/20-3/23/20 (80.96% to 2.3%) coincided with a -35.51% SPX price decline. Since the Mar 2020 bottom, both the SPX price and % of SPX trading above its 200-day ma indicator rallied sharply. The indicator is now nearing a major test of resistance at the 200-day ma (55.85%) and extension of the late-Feb 2020 breakdown (58%). The ability to convincingly surge above this key resistance signals a retest of the Jan/Feb 2020 highs (87.17% and 80.96%). Will this also lead to an SPX price rally to test the Feb 2020 all-time high (3,393.52)?


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


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