[True Trader's Sunday School] When This Happens... Trouble Lies Ahead

Today we go deeper into the market. [Image]( [True Trader's Sunday School] When This Happens… Trouble Lies Ahead Dear Reader, Last week, we began looking at one of THE most important ideas in all of investing – breadth. We said, "understanding breadth, even just by itself, will clarify the stock market for you." Chris Rowe Founder True Market Insiders And we looked at why the major market averages do NOT give us the ability to look inside the stock market and to gauge the level of participation at any given time. Today we'll go deeper… Participation This idea of a "level of participation" in the stock market is fundamental. The reason is, market advances are stronger when they include a larger number of advancing stocks than when only a select few are increasing. Obviously if a larger number of stocks are trending higher, your odds of picking a stock that trades up are higher. And if a larger number of stocks are trending lower, your odds of picking a stock that trades up are likewise lower. Also, if the majority of stocks are trading lower while the cap-weighted indices are moving higher, it's likely that the cap-weighted indices will soon follow the crowd and move lower. Then, when people finally do see those popular indices moving lower (on the news for instance), it causes a bearish mood among investors which pushes stocks even lower as more participants sell so they can get out of a falling market. Most individual investors look to the Dow Jones, the S&P 500, or the Nasdaq Composite when trying to determine the strength or direction of the market. In reality, those major indices should only be used as one of the many tools you can use to gauge the strength and direction of the market. Breadth Indicators Breadth indicators give us a clearer picture of the internal strength and overall health of the stock market. This is because breadth indicators reflect the number or percentage of stocks that are actually advancing or declining, or that are gaining or losing momentum. When the majority of stocks are advancing, the market is experiencing positive breadth. When the majority of stocks are declining, the market is experiencing negative breadth. And just because more stocks are advancing than declining, that doesn't mean that the major averages are advancing. Breadth indicators can be applied to broad market averages, or sectors. Let's focus on the breadth (or internal health) of the general market. Most breadth indicators are used to determine risk by revealing negative divergences. That is, when advances in cap-weighted indices (like the S&P) are NOT being confirmed by "positive breadth" (more stocks advancing than declining), that's not a good sign. In fact, it's often a precursor of a stock market top (whether it be short-term or long-term).     "When the Soldiers No Longer Follow the Generals, Trouble Lies Ahead." In the coming weeks, we will be discussing several breadth indicators, each of which is slightly different, but useful in its own way. Each of the different readings indicates strong or weak breadth, based on different criteria. The market condition is considered favorable: 1. When the advance of the major indices are confirmed by positive breadth readings. In other words, the market internals are strong because the majority of stocks are participating in the advance. 2. When the major indices are moving slightly lower, but breadth readings are positive. This is called a "positive divergence", which signals a turnaround. Here, the price action (lower) is not confirmed by the breadth readings (because although the index moved lower, the majority of stocks did not). If the index moves lower while breadth readings are neutral, it is a less bullish but still positive sign. The market is not favorable: 1. When the major indices are advancing higher while breadth readings are negative. This is called a "negative divergence", which is often a precursor to a downside move. Here, the price action is NOT confirmed by the breadth readings because although the index moved higher, the majority of stocks did not. 2. When the major indices are moving lower while breadth readings are negative. In this case, the price action (lower) is confirmed by the breadth readings because the majority of stocks are also moving lower. Naturally there's a lot more to say about this, all of it useful and valuable. Check back next week when we'll dive into our first breadth indicator. We'll cover it first because it happens to be my favorite. And it's my favorite for a reason. It's called a "Bullish Percent Index" and it's literally the most important breadth indicator you'll ever learn about. See you then!   [Here’s Why to Ignore Steve Martin’s Stock Tips]( [Why Fed Rate Hikes Don’t Bother Me]( [Today Let’s Bury a Costly Myth](     [YouTube]( [Facebook]( [Twitter]( [Instagram]( [LinkedIn]( DISCLAIMER ©2023 by True Market Insiders, LLC, Protected by copyright laws of the United States and international treaties. This Newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of: True Market Insiders, 7901 4th St. N STE 6113 St. Petersburg, FL 33702. The information contained herein has been prepared without regard to any particular investor's investment objectives, financial situation, and needs. 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