Here’s How the Market Breadth Behaves Before a Stock Market Crash

There are different ways to interpret the market breadth such as measuring the stocks above 200-Day average as shown in the post on divergence between the market breadth and SPX, or determining the overall net 52-Week high/low in the stock market, which you will find out more in detail shortly.

The Market Breadth vs S&P 500 in 2018

In 2018 after a change of character occurred in Jan, a trading range was formed in S&P 500 between 2530-2880. After a failed breakout in Oct, S&P 500 had a sharp pullback of around 11% off the peak (as highlighted in orange in the chart). During this pullback, the market breadth (as highlighted in orange in the lower pane) broke below the 0 level by a large magnitude.

Subsequently, S&P 500 consolidated in a trading range between 2600-2800 while the market breadth failed to climb back above the 0 level, suggested that there were more stocks broke below 52-Week low than broke above 52-Week high. This was the key when judging the health in the stock market.

The stock market was given multiple chances to recover during the consolidation yet it failed to perform without committing above the 0 level as shown in the market breadth chart. This was an obvious market weakness because there were more bearish stocks than the bullish stocks. After close to 2 months of consolidation with market breadth below 0 level, S&P 500 eventually had a sharp selloff in Dec.

The Market Breadth vs S&P 500 in 2020

In 2020 there was an abrupt pullback in S&P 500 off the all-time high level triggered by the COVID-19 news while the market breadth flipped to below the 0 level with a large magnitude. Similar to 2018’s, the market breadth failed to rally back above the 0 level after the first leg down. This was where things turned sour as S&P 500 had a sharp drop just within 3 weeks after the inability to rally up in the market breadth.

Another thing to pay attention to is the direction of WTI crude oil (CL) because it has a very high correlation with the S&P 500 where it also crashed in 2018 and 2020 together with the broad market index. Check out my recent weekly live session video for free where I analyzed the seasonality of crude oil and the price volume analysis with an analogue to refer to.

The Market Breadth vs S&P 500 in 2021

In Nov 2021, the market breadth had another sharp drop below the 0 level with a large magnitude similar to 2018’s and 2020’s, yet S&P 500 is just 3 % away from the all-time high.

After the drop in Nov, there was an attempt to rally above 0 level in the market breadth with almost immediate rejection. This is similar to 2018’s scenario but with a stronger S&P 500. This is mainly because of the weightage in S&P 500’s components (similar to Nasdaq 100). Refer to the price volume analysis on 5 of these heavy weight stocks. When these stocks fail to hold, S&P 500 will start to crack.

In this bifurcated market, one could trade in either direction with care as it is expected to have high volatility in both directions. A break below 4600 should trigger more selling in S&P 500 to test the swing low at 4500. I will share more on the tactics for both long and short trades in this current volatile market in my weekly live session on Sunday. Click here to visit TradePrecise.com to get more market insights in email for free.