Monday, February 8, 2010

The Difference Between These Breadth Indicators Is Large And Bullish

Two useful breadth statistics that are tracked by Worden Bros. are the % of Stocks Trading Above the 200ma (T2107) and the % of Stocks Trading Above the 40ma (T2108). At the current time the difference between these two readings is very large. 72% of stocks remain above their 200ma, but only 24% stocks are above their 40ma. The only other time since 1986 when Worden Bros. began tracking these statistics that the difference has been this large was late October / early November of 2009. To get such a large difference between the readings you would need to have a strong pullback occur in a strong uptrend. I was curious to see whether such a strong pullback was likely to derail the long-term uptrend and lead to further selling. To get a better sense I lowered the required difference between the two to 40. Below are those results.

In general, returns were positive from day 1. From a long-term perspective, such sharp pullbacks have been followed by additional buying. Any uptrend strong enough that such a large number of stocks were trading above their 200ma that the difference could be as large as 40 simply didn’t fall apart when a strong selloff occurred. The 2004 instance saw a retest of the highs before the market underwent a lengthy but shallow selloff. The other instances all rallied through their old highs and kept rising. Instances are definitely low but results couldn’t be any more bullish.

While we are now way above a difference of 35, I also ran that to get a few more instances.

This seems to confirm the previous findings and suggests the current breadth differential is indicative of not a market about to fall apart, but rather a market that is likely to resume its uptrend – or at least test its recent highs.


Adam Berkowitz said...

great study, i am thankful for your post...

Tim said...

Though I haven't quantified the results, I use 3 Telechart indicators (T2106, T2108, T2114) for intermediate time frame buy signals.

Basic rules of how I use them:
All 3 must hit extreme values at the same time. Then when 2 or all 3 move out of these extreme value areas, a buy signal is triggered.

Extreme value criteria:


James Goode - On The Money said...

Thanks for this excellent study, which nudged me into going long a couple of weeks back. However we're now at the point where, if this rally is going to break down, it will and I note that in the second (35% difference) chart you posted there was one MASSIVE loser among the list of winners.

If you get a chance to look back, I'd be really grateful if could you check the date of this instance. I can only guess it was something like Oct '87 - in which case that would be important to know and look at closely! Thanks.