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Approaching Oversold In The Short Term at Trader’s Narrative

Here’s a quick update on the market breadth. As measured by the percentage of the S&P 500 Index components that closed above their 50 day moving average, the market breadth has seen a sudden collapse.

After reaching 90%, extremely overbought, in early June, this indicator has dropped 64% points to 26%:

percentage stocks SPX 50 day moving average July 2009

Historically, an important low level is around the 20% area. We’re aren’t there yet, but if we keep dropping at the same rate, we’ll get there by next week. But also remember that oversold in a bear market is a very different beast than oversold in a bull market.

Turning to the longer term view, the percentage of stocks above their 200 day moving average offers an interesting dichotomy. While the shorter term breadth has suffered along with the general stock prices, this long term breadth measure is still pretty much where it was in early May 2009:

percentage stocks SPX 200 day moving average July 2009

So while the percentage of stocks above their 50 day moving average has fallen from its perch of 90% (and slightly higher) in early May 2009, the 200 day moving average breadth hasn’t budged at all really. I’ve never seen a situation like this before so I’m not sure what it means, if anything.

The shortest measure of breadth, the percentage of S&P 500 components above their 10 day moving average, fell to 8.6% (chart not shown). That’s the lowest reading since March 2009, when the spring rally started. The lowest we saw this market breadth indicator fall to in recent times was last year in October 2008, when it reached 0%.

So the good news for the bulls is that stock market indexes are quickly moving towards an oversold condition, in the short term.

The bad news for the bulls is that when we last compared market breadth to 2003’s bull market, the key was for the long term breadth to remain elevated. That’s what happened before, at least. And it is to be expected in a strong bull market.

That doesn’t seem to be the case now. For about 12 months, the percentage of S&P 500 stocks above their 150 moving average remained very high, never falling below 70%. But the recent market weakness has taken this same breadth measure down to 64%, reducing the probability that we are not going to revisit the March lows.

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