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This is a guest post by Wayne Whaley, CTA:
Like many other technical analysts, I’ve written a great deal about the unprecedented three traditional breadth thrust that occurred in 2009. As a quick refresher: a breadth thrust is defined in the stock market technical encyclopedia as a 10 day period where the sum of daily advances exceeds the number of declines by a 2 to 1 margin (normally on the NYSE index).
As I mentioned last year, this indicator has an impressive record at predicting the intermediate direction of the market. We observed 3 such signals in 2009: on March 23rd, July 23rd and September 15th.
There is nothing magical about using a 10 day moving average other than that is the number of fingers that most of us are born with. On March 8th, 2010, we experienced a slightly different version of the breadth thrust signal, this time on the 20 day moving average.
Another way to measure breadth is to look at the number of advances divided by the total number of advances and declines (ADT). A 2:1 advance decline ratio would equate to 66.67% ADT. A 2:1 measurement over a month, is difficult to obtain but I have found that over a 20 day period, a reading of above 62 ADT is a very reliable indication that the market has solid intermediate breadth.
Below are the 10 occasions since 1970, when the 20 day average ADT reached 62, using standard NYSE data on what is now some 3200 issues trading on the Big Board. All signals within 20 days of a previous signal were considered a repeat.
This has an impeccable record of 9-0 with an average annual return of over 22.24% (note that the August 2009 signal is still ongoing and hasn’t completed 1 year). The 10th signal on March 8th 2010 isn’t doing too bad either, up 5.2% in the first 5 weeks of its arrival.
Many traditional short term sentiment indicators suggest that this market is due for a pullback. It is likely that the reason we aren’t getting it, is the tremendous momentum that the market continues to roll out. Recall that during this same period in March that this 20 day breadth thrust was observed, we witnessed two 9:1 up to down volume days within a one month period as well, which also has a perfect record of forecasting the 12 month positive direction. We may get a pullback, but I’m not inclined to look for more than a 5%.
I find it interesting that when the rally was launched in March of 2009, those that were fortunate enough to be in cash at the time, looked for a retest of the old lows to get in. By the fall, they were looking for a 10% correction. By the end of the year, investors on the sideline were looking for a 5% pullback and it seems that just recently, the retail investor is finally willing to start dollar cost averaging their hoards of cash back into the market at whatever price. Let’s see if they are responsible for another six month push upwards.
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