Breadth Test (again)
Last Wednesday, I showed a chart of a derivative indicator based on the NYSE TICK. At the time, I showed that it was in extreme oversold territory, and noted that if the market could not stage a rally pretty much immediately, then we had an early clue that the larger trend was likely changing, and the mindset of traders would be switching to selling rallies instead of buying dips. I think it's safe to say that that has indeed come to pass, and it is becoming more and more difficult for the market to sustain even short-term advances.
The market is now facing another, larger time-frame test. NYSE breadth is now moderately oversold, as defined by a 10-day moving average of up issues as a percentage of total changed issues (a.k.a. the advance/decline line) and a 10-day moving average of up volume as a percentage of total up and down volume. The chart is below. These ratios are now at a point that has been seen twice since March - the first kicked off the initial stages of the rally, and the second in late June lead to the last gasp higher into July. Each of those times, the market showed some rebounding power soon after the oversold readings were given.
Contrast those instances to what was seen in late January. At that time, these breadth measurements were equally (or more) oversold, yet the market was able to sustain only slight, feeble one- or two-day bounces. This was a very good sign that the market had further to go on the downside, as oversold conditions were essentially ignored - that is a hallmark of declining markets, just as the market ignored overbought readings in the rally since the March low (which has only recently begun to change).
The test here is clear - if the market cannot sustain a meaningful advance (this is fairly subjective, but let's say 2%-3%) sometime in the next few days, and instead begins to falter further, then we have yet another confirmation of the condition that we were tipped off to last week. That is, the mindset is changing to selling rallies, and it will be difficult for the market to cling to higher prices, but relatively easy for it to fall back.
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