Current Market Breadth Is... Bullish?

Current levels of market breadth have recently declined to near record lows. I explained the reasoning for this in the previous article however not to my surprise I continue to see this narrative pushed relentlessly on socials. Per Nomura, Spot Gamma -

And per Bloomberg; Tavi Costa -

Market breadth has long been an indicator of overall market health and declining breadth and thin leadership often indicates exhaustion in a trend. However these mean reversions often take a long time to play out as evidenced by the chart above. Furthermore, a contrarian approach may be warranted here. Enter the McClellan Oscillator. What Is the McClellan Oscillator?

The McClellan Oscillator is a market breadth indicator that is based on the difference between the number of advancing and declining issues on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ.

The indicator is used to show strong shifts in sentiment in the indexes, called breadth thrusts. It also helps in analyzing the strength of an index trend via divergence or confirmation.

With covering other strategies, the main gist of this indicator is that when the blue reading drops above or below the red boxes, the current levels of breadth weakness or strength are unsustainable and thus traders should begin to look for mean reversion. I've added my personal strategy here represented by the lower white line which is set at -200. As you can clearly see, a -200 or more reading is almost always a sign that the current level of breadth weakness is about to turn and traders should expect a fierce and robust rally in the coming days.

A reading of -200 or more is often followed by strong, sustainable rallies

We do have to navigate the FOMC decision tomorrow as well as the quarterly December options expiration but end of year flows are still very much bullish and the case can be made here that breadth is actually a reason to be playing LONG on this dip, not short. For access to premium trading content including swing trade alerts & live day trading room visit - https://www.carnivoretrades.com/ Youtube - @carnivoretrades

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