Market breadth is everything, I mean EVERYTHING…
Let’s take a quick look at what market breadth is according to Investopedia…
Now not all of us are Garrett Baldwin so let me break that down a bit so it’s easier to understand – put in simplest terms, is the market going up or down.
It is similar to momentum but market breadth gives us a broader picture of how well things are moving up or down.
I want you to understand something as we go into this, no indicator will get you 100% to the winning trade… But this one – This one will get you 80-90% of the way.
And if I can get that 80-90% head start as a trader or investor, let me tell you, I’m beating the pants off everybody else that is batting under 500 in the market.
Market breadth is coming into play as we see the trends starting to deepen their curves lower.
Now, if you’ve been with me for the last few months you know that I was kicking myself in the butt for not taking one of my most trusted overbought/oversold indicators to heart.
The % of stocks in the S&P 500 trading above their 50-day moving average.
Here’s the chart….
This chart shows you the % of companies trading above their 50-day moving averages, this is – the breadth of the S&P 500.
The simplest thing you can take away from this chart is whether or not the parts that make up the S&P 500 are failing right now – and to what degree.
In my eyes – and I’m sure you’ll agree with me – if a company drops below its 50-day moving average something is wrong, it is failing.
That 50-day is a trend line that traders use faithfully. If the stock is below that line it is losing momentum, it makes traders and myself alike go bearish on the stock which turns it into another one of those self-fulfilling prophecies where buyers are selling, sellers are running away and the stock takes a nose dive.
Look at this chart specifically in June and July, that’s Kenny’s josh brown bottom. That is the point where there was only 6% of the S&P companies were actually trading above their 50-day moving averages.
The math is easy here that’s only 30 companies…
Now, what does it mean when we see such a rare event take place? The sponge had been squeezed it’s all dried up. We are 1000% truly oversold. It’s an event that – if I’m being honest – just should not happen… but it did…
So what do you do with this? How do you find a trade in the market that really needs a Tic Tac? Well, when you see the market drop down to levels close to that really even just as low as 10%, there is only one direction the market can go.
The path of least resistance is up, this is where you need to dust off your bull buy list and use the method I’m going to be going over with you in the next couple of days to start buying things up to take some quick profits.
I missed one hell of an opportunity by not watching this and I’m done doing that. The missed opportunity was my traders’ tuition. I refuse to let that miss haunt me as it has been doing and not learn from that mistake.
The news isn’t good right now.
As you can tell, we usually accelerate into the lower readings, which makes sense as the market snowballs to lower prices as sellers start to panic. This results in a precipitous decline.
WHAT ARE YOU WATCHING FOR???
Well ive already told you that if the market breadth is below 10% it’s time to buy how do you know when to sell? Simplest thing I can tell you to watch for just in case you happen to miss a show on a super important day is to sell if the market breadth is above the 80% mark.
There is going to be a lot of resistance and people wanting to take their profits, things are becoming more and more overbought and that point is where you want to wait for the next trend so you can capture as much of a profit as you possibly can
So, where are the hot spots in the market that you need to be looking to trade in?
As you know I like to break it down sector by sector so that is exactly what I did just for you –
As you can see consumer discretionary and financials are the top two right now. They have the highest number of companies in the S&P that are trading above their 50-day.
They are also the sectors that I have been warning you about for the past couple of weeks that are most at risk as interest rates continue to blast higher.
These are companies that are set to lose the most as the consumers – you and I – are being stretched thinner and thinner as more money has to be taken out of the pocket just to cover our basic needs of survival. The things we havent been able to afford we would typically just finance but even that is becoming more and more out of reach as we end up getting buried in interest payments.
The only way to trade these is to remember that these stocks will have to follow the market… eventually.
So you take the ETFs that cover these sectors you buy yourself the time for the market to come to you, and you short them…
For what it is worth here is also a list of companies in the QQQ that are finding themselves in the same situation-
You should just listen to me on this and trade with the Night Traders and Penny Nation folks. But, if you want to do it on your own, just start watching for single-digit readings as a sign that the current selloff is running out of fuel.
Maybe if you ask nicely I’ll tell you which stocks to look at after that happens…
I’ll see you in the main room tomorrow morning!
September 22 2022