One Measure of Breadth Entering a Buy Zone

Yesterday we wrote about the Nasdaq Composite springing the bull breakout trap and today we’re seeing major indices dance around slightly red on the day struggling to put together a follow through day to the downside.

One measurement I like to use to determine how frothy we are to the up or downside are a % of stocks above a moving average, in this case the 10SMA:

Note we’ve unwound the overbought readings from early December and are now seeing a reading of about 25% of stocks in the S&P500 above the 10 day moving average.

Looking left, we can see this type of reading generally coincides with bounces in the market shortly thereafter.

Does it mean we have to bounce today or tomorrow? Of course not, its simply a way to add additional market context to your strategy or framework.

The more we sell off in the near term, the more interested I would be in looking for a reversal to buy.

Good luck out there.