Bad Breadth and the Market (by Biffermas)

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Bad breadth 
The McClellan Oscillator is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE.  It is primarily used for short and intermediate term trading.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It's interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends.



Both show great value when the major indices make new highs or lows, but the McClennan's fail to validate the movement.  This indicates lagging participation in the ongoing trend and shows the possibility for reversal.  Recently, the S&P 500, Nasdaq 100, and DJIA all made new yearly highs, but the MO and MSI failed to follow.  I’ve marked the divergences on the following charts.  Upon closer inspection many sub-sectors failed to make new highs, including small caps, industrials, materials, banks, and homebuilders.  Truly this bull is suffering from market halitosis.



As always, obey your stops.  This market has proven it has staying power and routinely ignores bad internals to blast higher.  We’ve seen many bounces off oversold McClellan readings over the past 6 months, so be careful at these points.  Taking partial profits, hedging, or closing positions should be considered.

(Editor's Note: I am in awe of the quality Slopers are generating here; wonderful stuff; thank you so much! On a less cheery note, sorry Disqus is stinking so badly. I know how important comments are to the Slope experience – Tim)