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Market Breadth Approaching Overbought Levels at Trader’s Narrative





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Here’s yet another metric showing that the market may be approaching overbought conditions:
percent spx above 50 MA april 2008

For those unfamiliar with this indicator, it is the percentage of stocks within the S&P 500 Index (SPX) which are trading above their simple 50 day moving average. So for example, if we had 100 trading above and 400 trading below, that would give us 20%.

This is a very good measure of the market internals and it has been a useful yardstick to measure oversold and overbought conditions. It was one of the indicators which got me bullish in January. Admittedly, that was way too early.

The concept can be equally applied to any moving average. Obviously the shorter the moving average, the shorter the time horizon of the metric. With the exception of the 10 day moving average which has proven to have incredibly prophetic characteristics even into the long term. In mid March the percentage of stocks trading above their 10 day moving average declined to an unbelievable 3%!

Getting back to current market conditions, we are now slowly approaching the other extreme: overbought. We aren’t there yet. Usually the market tops out when this percentage gets between 80% and 90%. When the market topped out in October 2007, this indicator reached 85%. But right now we are only at 74%.

So its just something to watch out for. Especially when compounded by other sentiment and technical indicators which similarly argue for a pause or retreat.

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5 Responses to “Market Breadth Approaching Overbought Levels”  

  1. 1 Johan

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    Has it reached danger zone now?

    Thanks!

  2. 2 Babak

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    Johan, this measure is now around 78% so technically - cue Kenny Loggins - we are now right into the danger zone.

  3. 3 MAVERICK

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    Hi Babak,

    What website can you view to get historical data on the % of stocks within the S&P 500 that are above their 50% MA?

    Thanks,
    Maverick

  4. 4 AndyS

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    Great article. I am only starting to get into technical analysis (I prefer fundamental), so I was glad to discover your bog. I have subscribed and look forward to reading it regularly.

    Andy.

  5. 5 Babak

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    Maverick,
    stockcharts.com - in an upcoming post I’ll explain how to ‘hack’ it to get long term charts.

    AndyS,
    glad you enjoyed it. Whenever you get tired of driving by looking in the rear view mirror (fundymental analysis) come on over to the dark side ;-)

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