Be sure and catch out one-hour webinar next Wednesday. This will be a wonderful opportunity to discuss how the information in this Blog Post has played out. Register here.

Stock market readth is registering some of its most extreme downside readings in years. The relationship between price and breadth has been one of the most consistent relationships from a behavioral context over the thirty + years I have been trading. I discarded attempts to diving “sentiment” years ago; The measures and means to determine sentiment were and still are, too nebulous and of no consistent use. The price/breadth relationship is a far better measure of actual market sentiment than any other form of sentiment measure I have found. It is logical that this is so. The price/breadth relationship is reading what actual market participants are doing, how much and when. Who cares what someone that owns three mutual funds in their IRA thinks about where the market is going, which is what comprises a lot of what is considered market sentiment?

Below is a current chart displaying three measures of Market Breadth, a 10-day MA of NYSE advancing issues, a 3-day moving average of NYSE advancing issues and NYSE Breadth (Adv. – Decl issues). All three of these measures are presently at multi year extremes.


Below is a chart of the decline in the summer of 2011. The 10-day MA of NYSE advantage issues and breadth were slightly more extreme than at present, but another day or two of downside and the present readings will most certainly approach those of this time period.


Here is a chart of the 2008 climactic decline and subsequent low that formed in March 2009. Again we can see readings more extreme, but similar to what we are already seeing in the price/breadth relationship. Perhaps most importantly if you study these charts you can see that even though these were what can be considered extreme declines in a short time frame, most of the declines were retraced during the Auction Market rotational process almost the entire way down into final lows! This has important implications regarding money management and the reasons so few traders make money even when they get the direction a market is going correct (much more on this in the upcoming webinar).


What’s next? A momentum low is likely in place. As long as breadth does not exceed Wednesday’s – 2385, while a lower low(s) might occur, most of the price damage should be limited for now prior to an attempt at a rally that is likely going to be very sharp. Then further downside likely comes into play.