10 Day Cumulative Breadth Ratio
This is a chart developed by one of the Stockbee member based on Market Monitor. The chart shows days when the Stockbee Cumulative Breadth Ratio was above 2. That period is marked in green. You will see that when a big up move in market starts the ratio goes above 2 and remains above 2 during the beginning part of the move.
Stockbee Market Monitor is a breadth based tool to identify good periods and bad periods for swing trading. The key idea behind them is to reduce risk by trading momentum based methods only in highly favorable climate.
Momentum based methods can be extremely profitable under right market conditions. During such periods stocks make big moves in matter of days or week. The buyers in those circumstances are actively chasing stocks. A breakout based method has immediate follow through in such market.
When the breadth ratio is below 1 it indicates low momentum phases and in that kind of market breakouts tend to fail or have very small follow through potential. If you trade a momentum based swing trading method during those periods then you will be frustrated and will have death by thousand cuts as breakout after breakout fail.
As you can see in the chart as of now the Stockbee Breadth Thrust Ratio is below 1 currently. As of now it is at .8 which indicates lack of aggressive buying. If we see series of big 300 plus up days then the ratio can turn above 2.
Market Breadth is a key concept which every trader should understand. It can help you reduce risk and signal big turns in the market. Stockbee Market Monitor is just one way of doing it and I have discussed many ways to do this using breadth.
Breadth based timing tools are very useful in long term accounts also. For the 401K and retirement accounts I use a long term asset allocation strategy based on market breadth. The Stockbee Lemonade Strategy for 401K is detailed on the members site.