Thursday, October 28, 2010

Absolute Breadth Pointing To A Top

The absolute breadth index measures the absolute value of the difference between advancing and declining issues. In theory, high readings tend to be associated with bottoms with many stocks making new lows in a selling climax, and low readings tend to be associated with tops as momentum fades and there are few new highs or new lows. It is my experience that this is generally true, however, during a climax top it is possible to see high readings and at the retest of a climatic low it is possible to see low readings. Turning points associated with extreme readings of the indicator tend to be significant. One drawback is that sometimes the indicator precedes the actual turning point by two to four weeks, but that can be an excellent warning.

At the moment the index is reaching the zone associated with market tops. While the market could hold up a while longer, the fact that the wave count, volume and other measures of market breadth are now pointing to a top should be warning enough not to be taking on new long positions. The structure of the current market action is so strikingly similar to that of April, it would not be surprising to see a more powerful selloff than most are expecting.

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