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Earlier this month I compared the charts of the S&P 500 index and the S&P 500 Cumulative Advance Decline line because it showed a positive divergence. Although stock prices had fallen very close to the February lows, this breadth indicator was still well above its own levels from February.
The positive divergence is still in effect. The S&P 500’s Cumulative AD would have to drop by more than 2280 points or around 20% to erase it. But a smaller shift has taken place (or is about to take place potentially) and that is grounds for some concern.
Today, the AD line closed at 11527 . That is very close to the swing low from June 7th 2010 - 11359. So if we get even a little bit more deterioration, we could see breadth fall lower than price. On Thursday, the S&P 500 index closed only 23 points above the June 7th lows. And the S&P 500 Cumulative AD has to fall just 168 points to drop below its previous low. That is a very small amount for this indicator so it is entirely possible to see that happen tomorrow if the market is weak.
If that does occur, it damages the positive divergence that we’ve enjoyed so far. This level is important on the AD line not just because it was a place for a previous low but also because in January and February, it acted as resistance. This is an important indicator because it tells us just how much participation a directional move has.
Another breadth indicator that I’m monitoring is the percentage of S&P 500 components above their 50 day moving average. This percentage fell below 20% again today. Out of the past 25 days, this measure has been below the 20% level for 15 days - 10 of them consecutively. And don’t forget that the longer term percentage above 150 day moving average dropped from its lofty level some time ago. It is now at 38%. For more, see: A Subtle Shift in the Balance of Power. I’ll write more about these indicators tomorrow.
For now, it should be obvious that the more we see the market wallow in oversold conditions as it has been and refuse to mount a serious rally, the more the tone of the market changes.
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