Extreme positive or negative breadth leads to reversal
When breadth becomes extremely positive or negative such situations resolve in trend change or pullback or correction. In Market Monitor when following things happen it indicates extreme breadth
# of stocks up>25% in a quarter goes below 200 (bullish)
# of stocks down>25% in a quarter goes below 200 (bearish)
# of stocks up>50% in a month goes above 20 (bearish)
# of stocks down>50% in a month goes above 20 (bullish)% of stocks in confirmed uptrend using Guppy MMA goes below 30 (bullish)
% of stocks in confirmed uptrend using Guppy MMA goes above 70 (bearish)
Such high readings should be interpreted as bullish zone or bearish zones. The actual bullish or bearish reversal may take 8 to 10 days after readings reach such extremes.
Breadth thrust precedes trend change
Breadth thrust means a dramatic change in breadth in short period of time. Breadth thrusts are typically calculated using cumulative breadth. To further refine the breadth thrust smoothing is used along with exponential average of breadth. Then the ratio is further converted in to a oscillator. Zweig Breadth thrust, Absolute breadth Thrust, McClellan Oscillator and many other indicators are based on such breadth thrust calculation. (The actual maths used in doing that is complicated).
Breadth thrust in either direction after a long rally or decline indicates change of trend. In Market Monitor Breadth Thrust is indicated by 10 day ratio.
When the 10 day ratio goes above 2 after market has been in bearish phase for sometime, it indicates bullish breadth thrust and possible change of direction for market.
When the 10 day ratio goes below .5 after market has been bullish for sometime, it indicates a bearish thrust and possible change of direction for market.
Breadth crossover confirm trend change
When breadth turns from positive to negative or the other way, it indicates confirmation of primary breadth trend. In Market Monitor this is indicated by:
# of stocks up>25% in a quarter / # of stocks down>25% in a quarter
# of stocks up>25% in a month / # of stocks down>25% in a month
# of stocks up>13% in 34 days / # of stocks down>13% in 34 days
What happens at the beginning of a rally
A big 300 plus day on # of stocks up> 4% in day on high volume
Series of 300 plus days in 5to 10 days time frame.
The Cumulative Breadth Ratio goes above 2 confirming start of a bull move.
The Primary Indicator turns bullish
Bottoms tend to be formed suddenly.
What happens at the end of a rally
There is a slow deterioration in breadth on Primary Indicator.
After weeks or month Primary Indicator turns bearish.
The cumulative breadth ratio goes below .5
Real selling starts after that.
Breadth deteriorates slowly at the top
Tops take a long time to form and are difficult to spot. This correction is not following that pattern. I have studied every top in last 40 years or so and seldom market top starts with a crash.
Breadth suddenly improves at bottom
Market bottoms happen suddenly. Market turns often are a single day phenomenon.
Why it is difficult to understand breadth for beginners
Because lot of concepts in breadth are new to them. Many breadth charts are not interpreted the way most people are used to interpreting charts.
For example Zweig breadth thrust charts are hardly useful because the breadth thrust signal definition is when the readings go up from below 40 to 61.5% that indicates start of a big bull move. The average gain after such breadth thrust is 24% in 11 months post signal. But the signal is very rare. The last Zweig Breadth Thrust signal was on March 23 2009. Before that the breadth thrust gave a signal on August 23 rd 1984. So if you look at Zweig Thrust charts everyday, it is waste of time.
Similarly interpreting McClellan Summation Index is difficult unless you understand the concept behind it. The charts by themselves of it do not tell you much about how signals are generated.
I will again advise anyone serious about market breadth to read The Complete Guide to Market Breadth Indicators: How to Analyze and Evaluate market Direction and Strength . It will take you some time to understand and interpret market breadth.