RetailTrader.Net - Stock Market Breadth

Think of stock market breadth as an X-ray snapshot of what's going on inside the market. By using and studying these indicators you can get a very good idea of the sentiment and power driving the current market climate and how the near future's sessions might play out. Read below to find out which indicators we use for our Retail X-ray and how we use them. Or click here for our weekly commentary on these indicators and their trading levels.

The number of stocks trading above their 200 day moving average is a very important number. As the 200 day moving average is said to represent the line in the sand to determine if the bulls or bears are currently controlling the market, it would stand to reason that the more stocks trading above their 200 day moving average, the stronger the market. And vice versa for the number of stocks trading below their 200 day moving average.

This is very true. And we love to use this indicator to take note of extremes in the market. Primarily extremes to the downside. As this indicator seems to work better highlighting important bottoms, that's what we use it for.

What we're looking for specifically is any number lower than 20. Which means less than 20% of the stocks on the S&P 500 are trading above their 200 day moving average. When that is the case, extreme fear controlls the market and as a result there's usually only one direction for stocks to go: up. Let's take a look at an example chart from April, 2008.

On top is the Spiders S&P500 ETF (SPY) which is the ETF that tracks the Standard & Poors 500 Index. On the bottom is the Telechart T2107 indicator representing the number of stocks in the S&P 500. We'll be the first to admit this does not look like anything special. But watch what happens when we line up those significant bottoms.

As you can see, climaxes in the T2107 indicator line up very nicely with bottoms in the SPY. And if you look even closer you will see that they occur at fairly regular intervals of 4 years each. This is what's known as a market cycle.

Another indicator very similar to the T2107 is the T2108 which measures the number of stocks trading above their 50 day moving average. We use this indicator to gauge where we might be on the short term time scale. Here's an example of this chart:

As you can see, we are now on a daily chart, and that the T2108 does a great job of picking short term bottoms. But a word or caution here. Before you start screaming Holy Grail, Holy Grail, know that no indicator is right all the time, and these two are no different. They require a working understanding and familiarity with both the stock market and index correlation before they should be put in your toolbox.

Well, that about does it for our use of breadth indicators. If you're beginning to understand anything by now it should be that we like to keep things simple. And we do. The more decisions you make in the market, the greater the margin for error. Once you have the basic principles of trade management and stock selection down, you will be entering and managing trades on less information than you ever thought possible, and loving it!

As far as the T2107 and T2108 indicators go, they are screenshots from the charting software: Telechart. You can find free versions at Stockcharts.com (we list the link under the CHARTS tab), but before you do that I want to take a second to tell you about what an amazing piece of software Telechart truly is.

Created by the amazing Worden Brothers, Telechart has been voted the best standalone analytical software for $500 and less for 8 years in a row by the readers of Technical Analysis of Stocks and Comodities Magazine! At less than $30.00 a month for their end of day data, Telechart lets you store thousands of charts on your computer allowing you to sort through them in hundreds of different ways.

Look at earnings, institutional interest, p/e ratios, indicator levels, create your own indicators, and get Don Worden's nightly commentary everyday after market close! We can truly say that no other product has been as responsible for our current success as Telechart. Period. But don't take our work for it, visit their site yourself. Their forum is free to join and you don't have to be a member.