I have mentioned the "Breadth of the Market" often and there is three main Breadth indicators that I follow each day. One being the net difference between Advancing minus Declining issues; Two, is the net difference between the Volume of advancing minus declining Issues; and Three is the net difference between the new 52 week highs minus the new 52 week lows in the New York Stock Exchange.
Of all three the Advance Decline (AD) Line is the most important in my opinion when looking for confirmations or divergences in the price action. If the AD line is leading price action during the day and the figure is strong, taking short trades has a negative expectancy, especially when the big picture is bullish in my strongest opinion.
Quite often these days I see the Breadth is lagging, non-confirming, or showing bearish divergence intraday.
Here is a look at yesterday's Breadth in the NYSE, and not only is it lagging, it is putting in a figure over 500 negative at the close with the market up on the day. Left hand side is the NYSE Index; right hand side is the AD Line. "Underneath the hood", on this day the market is weaker than the headline appears.
(Click on chart to expand)
The next chart is the S&P 500 mini futures, and on the left hand side is a 30 minute chart that shows trendline resistance and a failure to breakout in the blue oval yesterday. I believe there was no "juice" behind the move because of the weak Breadth intraday, and this sets up the short day trade back to a "High Volume Node" on the failure to follow through. If the AD line was strong leading the price action, the odds favor the short getting steamrolled on that break to the upside due to the order flow of the bigger picture being bullish.
(Click on chart to expand)
Looking at the Daily chart above, the right hand side has significant rising trendline support and major horizontal support around 1650. These are key reference areas for me to trade from at this time. Understanding the phase of development the market is trading in is critical before uncovering or looking for favorable trade locations. With that being said, any short trades need to be at best conservative. Should a trade setup like yesterday occur with instead a Bearish picture of the order flow being to the downside would be a reason to increase position sizing on the short. Otherwise the smaller degree timeframe analysis and trade management is the same. Trading is not about "Entry", it is about "Position Sizing/Money Management", "Risk Management", "Trade Management", and they all must play a role in decision making before entry.
Something else I feel strongly about is the Volume in the S&P 500. On the same 30 min chart above it is dominated by red bars on the lower sub-graph, which means bearish price action is accompanied with the heaviest volume, which is a sign of "Distribution" in a given timeframe. The pattern in Volume in the big picture is also one of "Distribution". This is when a market regularly goes up in price with diminishing volume, and goes down in price with increasing volume.
Next Breadth indicator to talk about is the 52 Week NH-NL's.
The 52 week NH-NL's is basically abysmal these days with the underlying index pushing toward new 52 week highs. There have been days recently on my platform where the issues that make up the NYSE Index were making more new 52 week lows on the day than new 52 week highs on a net basis.
Why is that important to me, and why it should be important to you? Because there is a statistically proven or valid history here. Let me put it this way... let's suppose you are in a Bear market as an example, and there are more issues making new 52 week highs than new 52 week lows, do you want to be positioned for a long term move to the downside or heavily short with leverage in that scenario? I know I wouldn't. This is a sign the Bear market may be coming to an end. If there is a Bear market and there are more Advancing than Declining issues, Bullish divergence in Breadth, and the AD line is consistently leading the price action to the upside, I wouldn't want to be trading heavily on the short side either.
What I am seeing these days is the complete opposite, which is a warning that the Bull market might be coming to an end. The Breadth is consistently lagging, or non-confirming intraday, the pattern in Volume is one of "Distribution" and the NYSE NH-NL's is abysmal when taken in context.
What is also important? These indicators may all be repaired. There is no reversal signal in price on the charts. The path of least resistance is higher on the charts. Do not fight the tape. There will be a time and day to be bearish, and take higher probability short trades with an increase in position sizing.
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