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October 12, 2012 / redman59

Looking at Market Breadth in a Different Way

Traders measure market breadth in a different ways some specific to the overall market or to individual indices, whether it be:

  • Advancers to Decliners
  • Up Volume to Down Volume
  • New 52 week highs
  • New 52 week lows
  • Number of stocks trading above “X” moving average
  • Intraday TICK or TRIN

One way I like to also measure breadth is by stocks trading above yesterday’s close AND that are trading above their open.  The key take away is that they are also trading above today’s open.  If a stock is trading above yesterday’s close it will show as positive for the day but if it is trading lower than the open due to a gap; then this is negative in my opinion.  This is caused by a gap up only to see sellers come in to the stock.

Today we saw a nice gap up in the indices only to see a close lower than the open in all of them and the SPX/RUT putting in positive days & DJI/COMP putting in negative days; a mixed bag.  I wanted to go back and look at the SPY to see how today measured to past experiences.  I used the SPY to mark the days as this provides accurate data for gaps (vs. indices) and used the performance of stocks in the Russell 1000 as this compromises the largest 1000 stocks based on market cap & approximately 92% of the market.  The measurement rules are provided below with data from thinkorswim:

  • Measured from the start of the rally on 6/4
  • SPY trading above the 50 simple moving average
  • SPY gapped up greater than 0.50%
  • SPY closed lower then the open

The results are on the chart below with notes:


So what is the takeaway from this (relative to SPY):

  • Next day typically puts in a doji-type candle
  • Next day close is flat or down, in order of signal number (+0.01%, -0.69%, -0.05%, -0.34%)
  • Today’s number of Positive Stocks (close > yesterday’s close AND close > open) was 2nd highest out of 5 occurrences

With this I can say that today did not seem too bad given historical occurrences.   It did make me wonder if this gap up would hold during the beginning of the day and we can see that it did not.  There seems to be many conflicting signals and when this happens I tend to stay light or go with more delta neutral positions when trading options.  In a whole there is no reason to be aggressive but on a positive note this still seems to be a market of stocks in that specific non-defensive stocks are still working.  Example, one stock that I am trading directionally via options is Visa (V) via a options calendar spread and I still have no reason to sell here even though I am looking to remove it tomorrow.  As noted on the stream, coal and metal stocks have acted well and when these specific industrial stocks are holding then it shows me it is still a tradeable market.

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