Thursday, February 7, 2013

Breadth Divergence Watch

One of the two main drivers of the Weekly Market Summary is breadth. It has been unmistakably strong since the November low. The chart below looks at $SPX in the top panel versus NYMO (middle) and NYSI (bottom). 

Generally, weak breadth (NYMO below zero) leads to weak prices. See September-November 2012 as an example. This week, NYMO returned below zero. If the stay is brief, then there is no problem. If this persists, NYSI (bottom) will start to fall and price usually follows. 

Note the long negative divergence between NYSI and price between February and March 2012 (yellow arrows). Eventually, it resolved to the downside with a 10% correction in $SPX.