Sunday, October 28, 2012

Weekly Market Commentary: Breadth Not Oversold

The last few weeks have seen sharp losses in market breadth strength.  The week past was no exception, although losses weren't as great as others in recent weeks. Breadth indices have still to reach oversold conditions, which would suggest a tradable swing low, so look for downside to continue.

The Percentage of Nasdaq Stocks above the 50-day MA finished the week at 34%, but is perhaps two weeks away from turning oversold.  Any rally from this point is likely to be temporary.  Which will only delay the development of a stronger swing low.


The Nasdaq Bullish Percents saw its biggest loss since posting a swing high. Technicals are middling, but it never reached overbough conditions, despite a decent rally from April's 2012 bottom.  The MACD histogram is on the verge of a 'sell' signal, so further downside is favoured.


The Nasdaq Summation Index is the smoothest of the three breadth indices I track. Last week saw sharp losses as it cut below zero. Like the Bullish Percents, it fell short of overbought technical conditions. Strong lows don't usually appear until it gets to -500 or below. Given Friday's position it's likely to be a few weeks before it reaches -500.


The Nasdaq remains a long way from a natural weekly support level. Horizontal support at 2,863 remains the favoured area to look for buyers.


Bulls looking for longside plays can take a look at the Russell 2000. Since attempting its breakout, it has since fallen back to declining support (once defined as wedge resistance). Narrowing candlelines demonstrate increased buying activity, and therefore support for the index.


The S&P is also holding a support level, this one defined by the April 2012 swing high. This may also offer bulls an opportunity early next week.


For next week, bulls have more to look forward too from the S&P and Russell 2000.  Tech indices remain caught between support, and away from a potential swing low in breadth.

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com. I offer a range of stock trading strategies for global markets which can be Previewed for Free with delayed trade signals. You can also view the top-10 best trading strategies for the US, UK, Europe and Rest-of-the-World in the Trading Strategy Marketplace Leaderboard. The Leaderboard also supports advanced search capability so you can tailor your strategies to suit your individual requirements.

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