Breadth Deteriorates: Is This a Threat or an Opportunity?
Welcome to the Chart Fix!
Key Takeaways
- SPY is in a long-term uptrend and displaying bullish breadth.
- Sometimes breadth signals occur before a breakout on the price chart, such as in the chart of RSP.
Breadth indicators deteriorated from mid-April to mid-May, but this is more of an opportunity than a threat.
SPY and S&P 500 breadth are bullish, which sets the bullish tone for stocks. This means bullish outcomes are more likely than bearish outcomes. With this in mind, we should treat pullbacks in price and breadth as opportunities. Today's report will start with SPY and S&P 500 breadth to set the tone, before we then turn to a bullish pattern for the S&P 500 EW ETF and a short-term breadth breakout that could foreshadow a price breakout.
SPY Sets the Tone with Uptrend and Bullish Breadth
First and foremost, the SPDR S&P 500 (SPY) is in a long-term uptrend, and more than 50% of S&P 500 stocks are above their 200-day SMAs. The chart below shows SPY breaking down from March 19th to 26th, and SPX% Above 200-day moving below 50%.
These bearish signals didn't last long as SPY surged back above the 200-day and broke short-term resistance on April 8. SPX %Above 200-day SMA confirmed strength with a move back above 50%. These moves return SPY and the S&P 500 back to bull market mode.
SPX %Above 200-day SMA fell from 61.6% on April 17 to 52.5% on May 15. Even though breadth weakened, the indicator remains above 50% and net bullish. Most recently, SPX %Above 200-day improved to 59.4% this week as more stocks moved back above their 200-day SMAs (blue arrow).
These charts were updated on Friday morning. Closing prices/values may differ.
Our report/video on May 8th highlighted the bullish pattern in the S&P 500 EW ETF (RSP) as well as the broadening within the tech sector.
Breadth Breakout Can Precede Price Breakout
Chartists looking to time the major index ETFs can combine price and breadth signals. Sometimes breadth signals occur just before a breakout on the price chart, which gives traders an upper hand.
The chart below shows the S&P 500 EW ETF (RSP) forming a bullish cup-with-handle in the top window. Popularized by William O'Neil of IBD, the cup-with-handle is a bullish continuation pattern that forms within an uptrend. It represents a consolidation within the uptrend. A close above rim resistance at 206 would confirm the pattern and signal a continuation higher.
The indicator window shows SPX %Above 50-day SMA ($SPXA50R), which is a short-term breadth indicator that can help with timing. A move below 50% signals a pullback in breadth. A subsequent break signals and upturn in breadth.
The indicator fell from July to November and broke out with a surge in late November. This coincided with a channel breakout on the price chart. Breadth fell sharply in March and the indicator then broke out with a surge above 30% in early April. RSP followed suit with a gap and breakout a few days later.
Currently, the indicator fell from mid-April to mid-May as RSP consolidated with the handle forming. Breadth improved this week as SPX %Above 50-day SMA broke short-term resistance on Wednesday. This breakout could foreshadow a breakout on the price chart.
We are also seeing setups in small-caps, mid-caps and their respective breadth indicators. This portion of the commentary continues for subscribers to TrendInvestorPro. There is also a comprehensive video covering the SPY, SPX %Above 200-day SMA, mid-caps and small-caps.
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