So... in yesterday's post, I discussed the deterioration in momentum that has been developing with the recent price declines in the S&P 500. This deterioration suggested that the recent declines in the U.S. equity markets may be drawing to a close. I think it is important to note that momentum was not the only technical factor suggesting that a change in trend is due.
We can find similar indications by looking at the breadth of the recent decline. Both the Breadth Advance-Decline Indicator and the McClellan Oscillator provide us a measure of the number of stocks that are actually moving in the direction of the larger market trend. The chart above shows that as the S&P 500 continued its trend downward through June and July, then number of stocks declining began to decrease. This suggests that the overall breadth of the decline became narrower as the trend continued, that the trend was losing its strength, and that a change in trend was becoming increasing likely.
This gives us a second technical indication that our recent breakout from the downward trend channel was not simply an upward correction, but that a more substantive change in trend was due. This supports my opinion that we are now in the early stages of a bullish, upward trend pattern.
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