There are a lot of ways to judge a market's breadth and it is important that you do so. While rising price is what pays, as they say "The most bullish thing a stock can do is go up", you'd be well advised to check on the vitality of the rally for perspective. One of the problems I've seen with this rally, which I have referred to as a "Bear Market Rally" is the fact that the rising trend has been dogged by decreasing volume. A strong uptrend should see an increase in volume. Furthermore, we have just underwent one of the most severe bear markets in most people's experience, I don't think it is done and I don't think that the process of basing for the next bull market is anywhere near complete.
So, luckily for me, Worden has done a lot of the work of uncovering a market's breadth using the "T-2" series of indicators available to you through TeleChart. The charts below are all in the T-2 series. The indicator itself is the green line, while the market it is being compared to (most cases all NYSE stocks) is red. What we are looking for here in large part is either confirmation or divergence. Lets take a look.
Above we have the NASDAQ Advance/Decline Line compared to the entire NASDAQ Composite (red). Note that the Composite made a new recovery high in mid October, however declining issues were on the rise as you can see the green A/D line failed to confirm the new high by failing to make a similar new high. Furthermore, while the Composite has not pierced the late August reaction low, the A/D line has and then some; so we now see a negative leading divergence in the A/D line.
Above we have a comparison of all NYSE stocks and an indicator showing the % of stocks above their own 40 day price moving average. In April/May this was nearly 90% of NYSE stocks above the 40 moving average. Recently, each new high in the NYSE has seen a lower high in the indicator. Now we have another leading negative divergence as price is near recovery highs while the % of stocks above this average is about 26%-a very ominous sign.
Next, above we have a comparison of the NYSE vs. % of stocks 2 standard deviations above their 200 day moving average. Near the recovery highs in September this number was around 55%, the recent new recovery highs have seen the % plummet to 45% and the reaction low has created another negative downside leading divergence hovering just above 7%.
The next chart is similar to the last, but instead of 2 standard deviations above the 200 day average, this is 1 standard deviation above the 200 day moving average. Again, the most recent new recovery high in the NYSE stocks has not been confirmed with a similar high in the indicator thus giving us a relative negative divergence (relative between the last 2 recovery highs). Also we have a leading negative divergence as the % is now around 60% which is a % not seen since mid-July.
Next we have 1 standard deviation above the 40 day price moving average of the NYSE stocks. You can see the number has been as high as 80% at the August high. The next new high during September saw the number fall to about 75% and the most recent recovery high in October saw the % around 60%. On the recent pullback this indicator has created a massive leading negative divergence coming in at about 11%, a reading not seen since this rally kicked off from the lows established in March. while the indicator has been warning us for some time, we are now at a level that suggests this market is exceptionally thin in terms of breadth-meaning it is advancing on fewer and fewer issues combined with lower volume, this is a very dangerous time to be a buyer of equities.
Again, another similar indicator except this one is 2 standard deviations above the 40 day moving average of all NYSE stocks. And again we see the same negative results. The September recovery highs saw a reading of 55%, the October new recovery highs in the NYSE saw an indicator reading of about 30%-another negative divergence, but more telling is the negative leading divergence we see now with a reading of only 2.59% which is on par with the June and March lows (ultimate market lows for the NYSE stocks.) This is another example of an extremely ominous negative leading divergence to the downside and is very teling of the current rally's breadth and strength. Taken with the readings of volume and many conventional indicators, I believe a strong arguement can be made for assuming that we have seen the end of the bear market rally.
So there you have it. I strongly suggest you take advantage of these indicators (there are a lot more as well) that are a part of the TeleChart charting software. I am an affiliate for Worden, both platforms-StokFinder and TeleChart and I'd very much appreciate you using my links or if you decide to sign up, please let them know that you heard about them from Trade Guild. Using my links won't cost you a cent more money, but it will pay me a small commission and this is part of how I keep the information on this blog as free. I appreciate it very much-please check out our other affiliates as well.
