What is market breadth telling us?

Sometimes we should move away from looking at price (charts) only and assess other charts to determine the likelihood of continued downside or upside and/or which direction the next larger and longer term move will be so we can position ourselves more properly. For this we have several charts to our disposal, and here we’d like to share two of them: the SPXMO (McClellan Oscillator of the S&P500) and the Summation Index (SPXSI; cumulative SPXMO).

Looking at the SPXMO, Figure 1, we can observe it continues to be unable to break above the dotted black trend line in place since March, despite several good buy signal set ups over the past week: close outside followed by a close inside the lower Bollinger Band & it bottomed in our “buy able zone”. But, the more time passes the lower that trend line goes and the easier it will be for breadth to “jump” above it. )

Figure 1. SPXMO over the last 12 months

spxmo

The SPXSI, Figure 2, has now a RSI14 reading very close to the three lowest levels seen during this Bull since the SPX667 bottom: even lower than during the Aug. ‘15 and Jan. ‘16 corrections. The text and horizontal line colors match and correspond with these three lowest SPXSI’s RSI14 (green, blue, red) levels since that bottom in March 2009. Hence, the SPXSI is running out of room to drop any further. This means it has to start to move up soon, which it only can do with positive make breadth. That in turn means rising market prices. Note extreme low RSI14 readings can coincide with a bounce first to set up positive divergence before the real rally starts (shown: Sept. ’15, Febr. ’16, July ’16), but is not necessary (not shown: Aug. ’15, Oct. ’15).

Figure 2: SPXSI’s RSI14 at historic lows and running out of room to drop further.

spxsi

Bottom line: The RSI14 on the S&P500’s Summation Index has now reached its 3rd lowest level since the March 2009 SPX667 low: even lower than the Aug. ’15 and Jan. ’16 corrections. It is thus running out of real estate to drop even further. This means positive market breadth is logically coming soon, which will mean rising market prices. Markets can either rise directly from here to new highs, or bounce first to set up positive divergence (lower price low, but higher RSI14/breadth reading) before rallying to new highs. Based on the charts we can’t be certain about which of the two it will be just yet, but we can be certain a rally is forthcoming.

Re-posted, in part, from our recent weekly digest, available to premium members only. Please click here to become a premium member too so you get all this info and more first, and have the edge.

One thought on “What is market breadth telling us?

  1. Pingback: Market breadth is getting very oversold again: can we expect another bounce or a meaningful rally soon? | INTELLIGENT INVESTING

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