Thursday, December 10, 2009

Absolute Breadth Revisited

The Absolute Breadth Index measures the absolute difference between the number of advancing and declining issues. The original theory was that a high reading would be expected at bottoms and a low reading at tops. At bottoms there are typically a large number of declining issues compared with advancing issues. At tops the number of advancing issues tends to fall first making the absolute difference between advancers and decliners low.

I have labelled the extreme readings in the Absolute Breadth Index above from March 07 to the present. Out of 12 high readings 8 are bottoms and 4 are tops. Out of 7 low readings 5 are tops, 1 was an acceleration point, and the current low reading is to be determined. I could have labelled one more low reading as a top from Feb 07. So, the theory seems to be supported by the market action over the last 3 years. However, one could say more generally that extreme readings are associated with market turning points.

Market volatility continues to contract and low volatility is generally followed by high volatility. Something big is going to happen soon. The only question is what. While the current action could very well be setting up to be another acceleration point, until resistance is overcome with force, there is little reason to believe that will the case. The probability lies with topping action as the SP500, in particular, remains under strong resistance.

It is encouraging to know that we should soon see a resolution to the current tight action. If it doesn't turn out to be a top, then I'll have to do what I did with gold, ie go with it. That turned out great, and this should too.

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