Breadth Thrust

Don FishbackStock MarketLeave a Comment

This is a chart going back more than 50 years showing signals generated by an indicator developed by the late, great Marty Zweig.

The indicator is a measure of market breadth. You take NYSE advancing issues, then divide that by the sum of NYSE advancers and decliners. You then take the 10-day exponential moving average of that ratio.

What you are looking for is for the market to go oversold as measured by stock market breadth, and then turn around and have nearly all stocks move higher in unison over a short period of time. To measure this effect, you look for the indicator to drop below 0.40 and then rally to above 0.615 in less than 10 days. I modified the criteria slightly, showing what happens when it drops below 0.40 and rises to above 0.625 in less than 10 days. The red dots are the signals, and they don’t happen very often.

As you can see, in the past when the advancing issues overwhelm decliners after a deeply oversold condition, it’s been a pretty reliable bullish signal. We’ll see if the past is any indication of the future. I bought some $SSO and $SPY.