To successfully trade stocks, or the major indices, one must consider three things: technical analysis, fundamental analysis and market breadth.
The focus of this blog is strictly market breadth.
Whether the indices move up, down or sideways, they always go through overbought/oversold cycles. Because of indexing and passive fund management, individual stock moves are strongly correlated with the broader indices. Therefore, being able to determine whether the broader market is overbought or oversold should go a long way in helping you time your trades.
The 9 gauges below (or on the front page) provide real-time readings for three of the most important market breadth indicators for the NYSE and NASDAQ: Liquidity, Market Pattern and Power, plus liquidity readings for the DAX, FTSE and CAC 40.
When Liquidity readings are within the green or red zone -- expect strong, directional trading, when the daily range may reach and exceed R3/S3 pivot lines.
When Liquidity readings are in the yellow zone -- expect choppy, rangebound trading, when the daily range usually remains confined within R1/S1 pivot lines.
The Market pattern number reflects the real time mood of stock market participants. Readings within the yellow zone are a sign of indecision and lack of strong bullish or bearish commitment among traders.
The Power indicator is based on the average power ranking for all NYSE/NASDAQ stocks. Extreme bullish and bearish readings signal short-term exhaustion.
Monitor these tools during the trading day to gain invaluable market insight.
The chart below the gauges shows the SP500 along with market internals in a historical context, and will be updated on a regular basis (whenever possible). As a rule of thumb, 3600 and 1600 are considered overbought/oversold levels. Meaning that when market. breadth drops below 1400, it's time to start looking for long entries, and when it climbs above 3600, it's time to tighten stop/loss levels and start looking for short entries.
You can learn more about our mobile apps here.
For CIT for TradingView, click here.
For CIT Collection for NinjaTrader 8 click here.