Market breadth has been in the doldrums for some time, which I showed mid-January (see here) and which is/was evidenced by decline SIs for the S&P500 and NASDAQ (COMPQ). Figure 1 and 2 below show the SPX-SI and NASI, respectively. Over the past month (NASI), and over the past 2 months (SPXSI) market breadth has been deteriorating. In fact to a point, where the SPXSI dropped to the 6th lowest level since the August 2011 low. However, price only dropped ~5%; hence that’s quite bullish as there is now plenty of room for market breadth to go back up and thus price too.
Figure 1: SPX-SI (Click to enlarge)
Figure 2: NASI. (Click to enlarge)
In addition, the SPXSI gave a buy crossover with the 13d EMA. Off such low readings, in all cases (11) except 2, the market continued up longer term. The NASI is very close to producing a buy crossover. In addition, looking at the RSI5, we can see + div for the SPXSI over the past week, with a lower SI, but higher RSI5. Readings below 30 mean headwind for the indices, readings above 30 mean things are improving, and so is then price. The RSI5 is now above that important 30 line. Over the past 4 years there were 13 similarly oversold RSI5 readings as during the past weeks. Except in 2 cases, each time the 30 line was passed, price continued to go up longer term (weeks +). Last but not least, the SIs remained above the important 0 and -500 level and the bears will have a tougher time when market breadth is improving (more advancing then decline stocks) and above these levels.
The NYSI shows a different pattern (Figure 3), which appears more bullish since it has been improving over the past 2 weeks with a buy cross over already given on January 26. The bulls want to see the NYMO (McClellan Oscillator) in continued positive territory as that will keep pushing the NYSI and price higher. Bears want the opposite. But with both NYMO (not shown) and NYSI in positive territory, the bears have not much to go by, until they can push NYMO into negative territory.
Figure 3: NYSI has been improving over the past 2 weeks. (Click to enlarge)
Last but not least, I wanted to show the Advance-Decline % for the S&P1500 (SUPADP). See Figure 4. We can see that the 10d MA of the SUPADP bottomed in mid-January and has been steadily increasing since, while price made lower lows. This positive divergence often signals a bottom formed. Since the 10d SMA keeps going up, it is logical to assume price will too. Tops are often not until we see first readings to 30-40, and then negative divergence developing (price up, but 10d SMA down). Neither has occurred yet.
Figure 4. 10d SMA of the Advance-Decline % for the S&P1500 (SUPADP signalling a bottom? (Click to enlarge)
In conclusion; the bears have managed to push market breadth to relatively low levels for the current bull market off the August 2011 lows. However, price has only gone down 5%. The SIs have turned the corner (from down to up); which over the past 4 years in most cases means continued higher price intermediate term. With the SPX-SI at such low and oversold levels there is plenty of room to go up, and thus for price too. Until the bears can get these market breadth indicators back into a decline, the bulls are driving the bus.
Please note that next week, baring any foreseen market disasters, I will provide initial price targets for the SPX, INDU and NAZ based on the currently developing chart patterns; which members of course have already received. In the mean time, please enjoy the weekly digest archive.