Chart of the Day: Very Rare Breadth Signal

by Enis May 9, 2012 7:35 am • Commentary

If the market does not close strongly in the green today, then we’ll get a signal that has only triggered 7 previous times since the March 2009 low.  The signal is based on the daily NYSE Advancers, a proxy for market breadth and participation.  If today’s Advancers number does not close above 2,000, which looks unlikely at the moment, it will be the 9th straight day below 2,000.  I’ve marked the previous 7 occurrences with red circles on the SPX chart below:

Chart: Bloomberg

The chart shows 5 instances where the market rebounded or continued rallying after the signal triggered, and in most cases at least 50 index points within 2 weeks.  In other words, it’s generally a bullish signal.  The 2 outliers are in June 2009, when the market went sideways after the signal before eventually bursting higher in July, and in August 2011, when the market crashed another 150 points lower in the 3 days following the trigger of the signal.

Today’s oversold signal indicates a good spot to look at some long call ideas, as the previous up-moves off the short-term bottoms have been quick, not costing much in time decay.  But simply buying stock here leaves one at risk to the rare crash-type scenario.