This will be a continuation of my previous weekend post titled ‘Tops Are A Process‘ – if you missed it please check it out as it remains relevant today. Since last week the SPX has been inching higher by a mere seven handles, which nevertheless is remarkable as the past two weeks appear to be part of a sideways correction. Many of you continue to wonder how much longer things can melt higher. To gain a better perspective we once again take a peek at market breadth and how it relates to price.
For the uninitiated – let me assure you that market breadth is completely unrelated to poor dental hygiene – ask any Brit. Here’s a good definition right off Investopedia:
Market Breadth: A technique used in technical analysis that attempts to gauge the direction of the overall market by analyzing the number of companies advancing relative to the number declining. Positive market breadth occurs when more companies are moving higher than are moving lower, and it is used to suggest that the bulls are in control of the momentum. Conversely, a disproportional number of declining securities is used to confirm bearish momentum.
Now that we have the theory in the bag let’s look at reality, which if you are unfamiliar with this chart should be rather sobering. The blue line is a 20-day SMA of the NYSE Advancing vs. Declining issues. Unless you are crossing the road assisted by a guide dog I have full confidence that you are able to make out the glaring divergences that form near meaningful market tops. This by the way is a phenomenon that has become intensified post 2008 after Bernanke started dropping cash out of helicopters (he never stopped by my house however).
The lesson here is that divergences start to form rather early in the game and take quite a bit time to resolve eventually. Usually it takes a spike above 2.00 followed by a drop into 1.40 to even get close to triggering a medium term correction.
Somewhat related is advancing vs. declining volume. I actually find this chart a bit easier to read and just like my wife this one tells me ‘wait – just a little longer’. There was a sudden drop halfway on the way up and since then the ratio has been creeping sideways between 1.5 and 1.75. It would not be unreasonable to expect a quick (fourth wave – cough cough) correction followed by a final push into our original 1600+ P&F target.
The take away message from both of these charts is that tops take time. The first bears on the scene usually wind up stuffed and mounted up at some market maker’s holiday lodge.
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This entry was posted on Sunday, February 10th, 2013 at 1:13 pm. Both comments and pings are currently closed.