Staying With the Trend

Charts courtesy of stockcharts.com

I mentioned in my previous post that key to success in the market is to identify a trend and maintain a position in the direction of that trend. One way of determining the probable future direction of the market is using breadth indicators. Here are two breadth indicators.

$SPXA50R indicates prcentage of stocks below 50 day moving average, tradeable bottoms usually see the indicator drop to 20-30% area, causing a short term wash out of sellers.

$SPXA200R is percentage of stocks above 200 day moving average. when it breaks below 40%, it gives an intermediate sell signal. It needs a move above 60% to reverse that signal.

Think about it! How can we have a bull with less than half the stocks below 200 day moving average?

It broke below 40% in Nov 2007. A move above 60% has not happened yet. S&P 500 price is clearly in a downward channel. it is getting very close to the bottom of the channel, and it may produce a bounce. But until the index shows improving signs of its internal breadth, every bounce should be treated with suspicion.

Breadth indicator signals should not be taken in isolation, a variety of them studied in conjunction with the behavior of the actual price may help us determine whether probabilties are in favor of the long side, or the short side of the market.