With the new market monitor charts up and running, it's a little easier to see how breadth was deteriorating over the past few months. While we're waiting for the markets to stabilize, now seemed like a good time to walk through the past six months. See charts here.

I've taken the Primary Breadth Indicator from the Market Monitor chart and added a chart of the spx so you can see how they work together. (Market Monitor was developed by Pradeep Bonde at StockBee.biz)

Back on August 30th, the market was coming out of a multi-month correction with a bullish cross over on the primary indicators. Not withstanding a few minor corrections along the way, September through the end of December was an ideal trading period for swing and position traders.

Breadth steadily increased and maintained its strength through December. Even when the SPX touched the 50 period ma in November, breadth remained strong and the market rallied higher from that point.

In January, things began to take a different tone. As the market made new highs, breadth started making new lows. And as many people have told me there was still money to be made during that period. You can make money in any type of market, the difference is, leadership was narrowing and our trades have to be more specific to the sectors that were working. Otherwise, breakouts were more likely to fail.

As breadth is increasing, the number of stocks that will likely follow through is higher, as breadth is decreasing breakouts are more likely to fail. Sticking with the very top sectors can keep you in the market longer but eventually something has to give. You can equate it to standing on a strong base made of rock versus standing on thin sheet of ice that can crack any moment.

As you can see, the market was flashing warning signals weeks in advance of this decline. It's up to you to figure out how to interpret that data and act on it.

One of the StockBee members (CKBergin) mentioned this market breadth indicator a week or so ago and I thought it was an easy-to-read breadth indicator worth sharing.

In short, Market Breadth Indicators tell us the underlying strength of the market or any given index. Stockcharts.com describes the Bullish Percent Index as:

The Bullish Percent Index (BPI) is a breadth indicator based on the number of stocks on Point & Figure buy signals within an index. Because a stock is either on a P&F buy or sell signal, there is no ambiguity when it comes to P&F charts. This makes BPI a straightforward indicator with clearly defined signals.

Basically, you are watching for the daily index line to cross over or cross under the 10 day moving average. When the you get a cross above, you would move in to the market, cross under you move back into cash.

You can watch the indicator for all of the major indexes:

$BPCOMPQ - Nasdaq
$BPNYA - NYSE
$BPSPX - S&P 500
$BPINDU - Dow

I attempted to create the Hindenburg signal in StockFinder. It looks like we are getting clusters of signal around the correct dates but it still needs some fine tuning. It's up on StockFinder under "PatientFisherman_HindenburgBeta".

Since we have been covering general market indicators over the past few weeks and the media has been giving the "Hindenburg Omen" some attention, I wanted to post some quick details on what it is and how it works.

One note; Any one using the Stockbee Market Monitor is already in cash or short. Our trading behavior over the next few weeks should not change based on any media speculation or hype. It’s business as usual.

According to Market Breadth Indicators by Gregory L. Morris,

Jim Miekka provided a significant indicator of market danger. The Hindenburg Omen is a sell signal that occurs when NYSE new highs and new lows each exceed 2.8 percent of advances plus declines on the same day. In addition, the NYSE index must be above the value it had 50 trading days (10 weeks) ago. Once the signal has occurred, it is valid for 30 trading days. During the 30 days the signal is activated whenever the McClellan Oscillator (MCO) is negative, but deactivated whenever the MCO is positive.

I didn't have much luck recreating the indicator in StockFinder, but I did find some detailed information over at Stockcharts.com. According to Chip Anderson from Stockcharts.com we have had an "unconfirmed" signal.

How to interpret the charts:
http://blogs.stockcharts.com/dont_ignore_this_chart/2010/08/hindenburg-omen-tracking-chart.html

Live chart:
http://stockcharts.com/h-sc/ui?s=$NYMO&p=D&b=5&g=0&id=p20489603975

We have examined a few breadth indicators over the past few weeks, but you can also use a simple concept such as moving averages to get you in and out of the market. Ideally, the best system would use a combination of market breadth and trend to indicate the prime trading zones. For instance, you could apply this moving average concept with a breadth thrust signal to support the signal.

This indicator uses three simple moving averages; 5 period ma, 10 period ma, and 20 period ma. When the moving average are in proper positions 5 > 10 > 20 you get an entry signal. I've also applied my standard 5 ma < 10 ma as an exit parameter. You could use this signal to tighten stops on all positions and/or take profits.

The green up arrows would indicate the trading zones, while the red down arrow would be an exit alert.

This is not an indicator I use on a regular basis but I was looking for a concept I could easily illustrate to people who were curious about market timing.

You can find the shared layout in StockFinder under "PatientFisherman_3TrendSignal".

There is mention in William O'Neil's , How to Make Money in Stocks. He states that an impending up turn in the market occurs, after a decline of 10-12 percent, while the market continues to drop, the upside/downside volume starts to shift.

Zweig states a ratio of 9-to-1, with two signals in any 3-month perod, suggests a strong market to follow.

You can grab this shared layout in StockFinder, PatientFisherman_Upside_Downside_Vol.

* Ratio of positive numbers will always yield postive numbers.

Reference: Market Breadth Indicators, Gregory L. Morris

When we enter correction phases of the market, I try to keep busy building new screens and catch up on my reading. It's a good way to learn new concepts and keep out of trouble. I just wrapped up The Complete Guide to Market Breadth Indicators by Greg Morris, and after the past few days I felt like this would be a good topic to discuss.

Draw downs are the bane of any swing trader's existence. How many times have you spent weeks or months building up your account only to have it quickly snatched away when the market turns to the downside? I know I've been there...many times.  It wasn't until I finally had a clear understanding of how these indicators worked that I started seeing significant long term returns in my accounts.

Market breadth indicators measure the underlying currents of the market for any given period, quantifying the underlying strength or weakness in the current move. A model will consist of one or many market breadth indicators to signal a entry or exit condition.

---Disclaimer: I do not receive any compensation from the sites, books, or other resources mentioned on this site. I am currently an active member of Stockbee.---

Currently, I use Stockbee's Market Monitor designed by Pradeep Bonde for my entry and exit signals. Following the Market Monitor I went into cash on 4/28 and have been SOH (Sitting On my Hands) for the past few weeks. Along with many of the other members, we have been waiting for the entry signal which has yet to happen. Last week 5/27, the secondary indicator signaled positive, but we did not get a confirmation on the primary signal so many members remained in cash. A few of us took some smaller teaser positions only to get smack down on Friday.

I have been using the Market Monitor for over three years now and have successfully avoided all of the large drops we have experienced since 2007. Additionally, I used the Market Monitor signals to manage both my trading and retirement accounts. Back in March 2009, I moved all of my accounts back into the market and pretty much doubled them over the next year.

A detailed description on how the Market Monitor works can be found at:
http://stockbee.blogspot.com/2010/05/if-you-want-to-avoid-market-surprises.html

Investor's Business Daily provides the "Big Picture" which offers a proprietary system where they notify readers if the market is in a confirmed uptrend, under pressure, or market in correction. This excerpt from their site details the concept of "Follow-Through Day"


System developed by William J. O'Neil to identify an important change in general market direction from a definite downtrend to a new uptrend. From the beginning of any attempted rally during a definite downtrend, a 'follow-through' day is identified when the index closes up 1.7% or more for the day on a significant increase in volume from the day before. The first two or three days of a rally are normally disregarded as it has not yet proven it will succeed and 'follow-through' with power and conviction. 'Follow-through' days therefore generally occur the fourth through seventh day of the attempted rally. They serve as a confirmation that the market has really changed direction and is in a new uptrend

Mark Minervini  has taken the IBD model and modified it with some of his own custom components. He normally posts weekly updates accessible to the public discussing his market timing model.

So far, I have been very happy with the Stockbee Market Monitor. I have spent the past three years mastering it and would rather focus my energy on building better watch lists than trying to reinvent the wheel.  Over the next few weeks, I will try to script out some of the indicators from the book and make them available via StockFinder.

In summary, if you want to be successful in the market, you need to start with a mechanism to tell you when to be in and when to be out. I highly recommend reviewing any/all of these sites to get a better understanding of the timing models available out there. You can use these models for your trading accounts and also your retirement accounts.