Breadth Indicators Picking Up Bullish Signals

JC Parets
May 24, 2021

The process of our analysis is such that we look at a variety of charts in order to arrive at a view at any given point in time. To make sure we're identifying new trends that are developing in the market, we have several breadth indicators that we track.

As we already know, the market has been in a bit of a mess off-late. Within this market move, different sectors have taken leadership- almost as if playing a game of musical chairs.

Over the weekend when I was going through the usual suspects (charts) I noticed a slight change in market activity. So here I am talking about it!

Breadth charts help us analyse the sentiment of the market. What we like to do is go through them at regular intervals to see the development of trends in the market.

So let's see what we've got.

For the purpose of this write-up, we will take into consideration Nifty 50. The large-cap index. Because that's really where the mess is. If you've seen the move in Mid- and Small-caps, you would've noticed the new all-time high and 52-week high readings that we've been getting!

Moving Average is one of the most important and one of the most simple tools in Technical Analysis. Here, we have the percentage of stocks trading above their 50- and 200-day moving averages.

Over the last few days, with the market recovering, we've seen a pick up in these numbers. The percentage of stocks in Nifty 50 currently trading above their 50-day moving average is a strong 77%. Notice how we're closing in on the same region as we were in, in early 2021, when the market rally was robust.

Similarly, the percentage of stocks above the 200-day moving average is 86%. While we are not crazy about exactly how close or how far the price is from its moving average, we like the direction that the moving average is taking. A moving average sloping upwards is positive and a moving average sloping downwards is negative. That is all we care about!

Higher highs, higher lows, and vice versa is Technical Analysis 101. When the price moves progressively higher, it's positive, and when the price moves progressively lower it's negative.

The way we track it in the form of a breadth indicator is that we look at the number of stocks making new highs/lows. A market does not crash overnight...at least for the most part. Early signals can be found in the expansion or contraction of short-term highs/lows.

Let's take a look at the shortest time frame first.

New 10-day Highs and Lows

We can see in the chart below that there has been a pick up in activity in the percentage of New 10 day highs. While there was a slight dip in mid-May as well, more stocks seem to be trading at a higher level, than they were 10 days ago. That's a higher high right there!

What would a 21-day trend suggest?

Well, seems like we've been getting some traction here as well. The percentage of stocks trading at a level higher than they were 21 days ago has also seen a jump. Consequently, the percentage of stocks making 21-day lows has contracted since April.

These charts are alluding to a renewed participation among the large-cap stocks. Is this a long-term view? No, because we're looking at short-term time frames.

What this does help understand is the sentiment that is developing in the market. What remains to be seen is if these trends show up on the long-term charts as well. You can be sure that you will be informed of the same when that does happen.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

Filed Under: