Market Breadth Check Ahead of Next Week
When I pick my chart of the day, it isn’t just something random.
After all, I’m a technical trading expert. These things are my love language.
Not just any chart will do. I want you to get something from it.
My goal each and every day is to help you to develop yourself as a trader, and these charts are one of the best ways for me to do that.
They give you something tangible to take and run with. And with these tools, you can execute the trades you’ve learned to find thanks to time spent with me and the rest of the experts here at Money Morning Live.
I also like to use this time each day to follow up on things and elaborate on ideas we talked about in the past.
Well, today I’ve decided to arm you with information to help you this coming week. Given that the markets are closed, it’s the perfect time for you to take a breath while you prepare for what’s to come.
Just last week we spoke about the percentage of companies trading above their 50-day moving averages, and I told you the importance of this trade.
If you missed it, here’s a simple view to get you caught up.
This is the day-to-day reading of the percentage of companies trading above their 50-day.
The higher this number is, the stronger the breadth of the market is.
Needless to say, this market decided to hold the onions on its sandwich for the past couple of weeks. (That’s a brea[d]th joke for you.)
The lower this number is – and right now, it is low – the less strength the market has. This puts the market in a position where it can easily continue to break down.
Well, about 10 days ago we dropped to a reading of 9%. Yes, 9% of the S&P was trading above its 50-day average. So among the strongest companies in the market, 91% of them were trading lower than their average price. Seems scary, doesn’t it?
Maybe.
Traditionally speaking, 9% is a number that will turn me into a bit of a bull. It is one of those extremes, kind of like an oversold RSI, that makes the market sentiment shift and people start to think we’re at a bottom.
You can see spikes start to happen all over the place as people start to flood into the market. They’re buying the dip – but they’re thinking it’s the floor.
But remember, this is based on one simple thing – it’s binary. Are the stocks above or below their 50-day? That’s it.
It won’t account for how far above or below they are. It won’t give you anything more than a “Yes” or a “No.” I’m sure you know just as well as I do that’s a dangerous game if you don’t know how to play it.
As expected we did get that bounce from the market, and we are currently trading around 20% of the S&P companies above their 50-day.
Now, this number’s still not something you’re going to write home about. Worse yet, we are at a low number and, as you can tell, it’s rolling over again.
That rally is coming to an end. The ones that are still holding out are the energy companies.
When we start to see those companies follow suit, there will be selling across the board.
So, as we head into next week and you start to plan out how you’re going to trade, and you’re putting your buy and sell lists together, remember this chart.
You can even just go to stockcharts.com and pull up a list of the companies in the S&P trading above their 50-day averages.
This will be your go-to list when you’re looking for what you should be going short on.
They may be flying high right now, but they’ll follow the trend. Just be sure you’re following my teachings and buying the time needed for the market to start to whip these companies in line.
I’m expecting this chart to drop back down to a reading of 8-9%, and when it does, that’s when we adapt again and start buying some short-term calls (for my Penny Nation and Night Trader folks).
For perspective, this is how the chart looked back in 2008-2009…
As you can see, when we have readings of 9%, the market won’t just shoot right back up. In a normal market, this chart will appear a bit less turbulent.
But we are not in a normal market right now.
Back in October and November of 2008, there were multiple days we trolled below 10% – only to go up and come right back down.
We should expect to see more of this as we continue to work our way through the year. Just as the Atlanta Fed said about inflation, we are not out of the woods yet…
I’m going to be putting together a list of companies trading above their 50-day that are currently at risk of following the trends we’re seeing.
This will be for us to go over next week, so make sure you’re there.
It is going to be an extremely valuable set of data that will yield well – if you know how to use it. And that is why you have me.
Until then.
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October 08 2022
