Quick Breadth Snapshot

• Posted by Derek
• on November 20th, 2012

Two days into a powerful upswing, should we consider this the beginning of a sustainable intermediate trend or simply another bounce doomed to failure? Let’s be honest, none of us know. All we can know is how we’ll prepare, and what we’ll do when various scenarios evolve.

The past few weeks have seen these short-term swings fizzle out faster than they had in prior months. Instead of ups and downs lasting a week or two, the ups have been chopped down at a day or two. I keep that in mind, but this rally has had more oomph than the past few so the potential is there to continue.

What keeps me from a full embrace that Friday marked an intermediate low? The following graphic is one I like to use when considering potential upside or downside:

I know, breadth-based support and resistance…weird, right? It’s not about predicting a target, I leave that to others. It’s simply a way to anticipate where we may be discussing a divergence in another day, or week, or month. We don’t really need to worry about it until it happens, and sometimes not even then. But given the difficulty(for me, at least) in forecasting a target, I like to have an idea of whether I’m involved with a low or high potential trade.

A couple of things pop out to me. First, I can’t consider Friday to be on par with historic washouts. Nearly 30% of my universe(noted by the 100 out of 370) mark Friday as a 21 day low, but at big bottoms that number goes up over 50%. Second, since yesterday we’ve lingered around 35% of stocks above their 50 day averages. That’s up off the low, but only equivalent to the November 7 reading when $SPX was at 1395. That tells me that, so far, this is simply a reversion to the mean trade that lacks the hidden underlying strength needed to drive a trend.

Bottom line, it’s not bad but I’m not convinced we have much upside beyond the low 1400s. That makes it critical to know our timeframe. Looking out a day or two, another 2 points on $SPY may be a great trade. Looking out a month or more, not so exciting. If we can go a few days bottled up on $SPX while fresh stocks begin moving up, I’ll have far more confidence that we can eclipse the early November highs. Until then, it’s a bounce that requires us to accept any future evidence that suggests it may be failing.

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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