How Market Breadth Guides My Actions

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  • on October 1st, 2010

In 2003, I began the habit of tallying market data each day.  It started out as rows and columns on a legal pad, and grew into Excel sheets with all kinds of formulas.  My collection efforts became more complex every day, until reaching a peak in 2007 as I was finally able to “let go” of data points that weren’t serving a purpose.

I’ve continued to collect and filter, collect and filter…adding some exciting ideas and dropping some less useful ones.  The excitement comes when information proves both useful and simple…there is truth in “less is more”.  I’d like to share what has become the simplest and most useful of my suite of homegrown indicators.

I’ve condensed into a graphic the progression of my “Days Since Hi/Lo” over the past month.  What’s shown is the # of days since each stock in my universe made a 21 day high and low.  Rather than just tracking a total each day of 21 day highs and lows, this tells me the living distribution of all highs and lows over the past month.  We are able to add a dimension of time structure by revealing significant swing pivots that I like to refer to as “Anchor Days” because they become the day most etched in traders minds as a broad-based rally or selloff.

If you look at August 31, you’ll see that, yes we were in a downtrend on a swing basis, but that a plurality of issues were looking back at August 25 is the downward momentum peak.  On succeeding attempts to make lows after August 25, the broader “market of stocks” was seeing less selling pressure.

Another key period was September 10, after an explosive 7 day rally from the August lows into obvious resistance.  What is seen in the “Days Since” graphic is a market of stocks still expanding in its participation.

This has become my go-to measure of market health for the following reasons:

1) Money Flow- it takes money to push beyond extremes. Comparing the # of highs to # of lows over the past few days tells us whether supply or demand is dictating the action.

2) Momentum- there comes a point when trend runs into support or resistance.  Comparing the current readings to prior days tells us whether an obvious trend has run into a brick wall or is simply pausing.

3) Broad- funny business goes on in the $SPX futures, but we can get a much clearer picture of true market structure by measuring whether the broad market is advancing or retreating.

4) Correlation- we can see in the distribution of the 800+ stocks whether we’re seeing pack running, or alpha dogs separating one at a time.  Once most stones have been turned, we’re at the end of the swing run.

5) Clarity- my mind can see a lot of things when looking at a chart, but the coldness of black and white numbers allows for even the most biased observer to admit unfolding developments.

A quick look at last night’s data shows a pretty high % of stocks making 21 day highs, a fairly obvious insight given the morning break beyond $SPX 1150.  While the action after the breakout was awful, I can’t declare us out of this “tailwind” market until I see one of 2 things:

1) A big “Since Hi” # in the rear view mirror by at least 1 day

2) A week of “Since Lo” figures catching up to “Since Hi”

This is no magic bullet, simply a better way for me to perceive the information being revealed by the market.  Breaking a rich and complex collection of data points into simple and useful information is a step towards quicker, more assertive action on those rare occasions when the stars line up.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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