As I reminded you yesterday, I’m a big chart guy.
I told you about a few easy ways to use volume as part of your technical trading strategy, and we reviewed a few examples of past Watchlist ideas that involved specific volume patterns.
We looked at Entravision Communications Corporation (EVC) and Houghton Mifflin Harcourt Company (HMHC) and saw that consolidation periods with unusual activity in the volume bars can lead to big stock moves.
I’ve spent years studying the stock market and learning how technical analysis plays a crucial role in developing your skills as a trader.
And really understanding how certain price levels can act as “support” or “resistance” will make a huge difference in the way you trade.
I also like to use moving averages (MAs) in my trading. As regular readers know, the 50- and 200-day MAs are some of my favorite trend indicators.
But today I want to talk about how to take your technical analysis to the next level using comparison charts and a bit of under-the-hood research.
Looking Under the Hood
I first talked about this way back on July 9 in my article, My Edge Saves You from Market Mayhem.
Back then, I was comparing the Nasdaq Composite Index against the percentage of stocks trading above their 50-day moving averages.
But today, I want to look at the S&P 500 Index and see what kind of foundation it’s trading on.
In the chart above, you can see the S&P 500 in the top pane and the percentage of S&P 500 stocks above their 50-day MAs in the bottom pane.
From mid-April 2021, the index has been enjoying a solid rally and has roared to a series of new all-time price highs.
But over the same time period, the percentage of S&P stocks above their 50-day MAs has decreased from 92% to 71%.
In a healthy market, the majority of names should be above this level, and 71% is still a solid reading.
However, this is what chartists call a “divergence,” and it indicates that the market is perhaps not as strong as it looks on the outside.
Even though prices are above the April levels, individual stocks are falling behind as evidenced by the percentage reading.
And I am seeing the same action around the 200-day moving average:
In this chart, you’ll see the S&P 500 in the top pane and the percentage of S&P 500 stocks above their 200-day MAs in the bottom pane.
From April to now, that percentage has dropped from a reading of 97% down to 74%.
Again, this is a fairly solid reading for a bullish trend, but it also shows the divergence from a longer-term perspective.
With that in mind, I’m not saying we are at the cusp of a nasty bear market from a technical perspective.
In fact, this is one of those bull market rallies that seems like it will never end.
But eventually, they all do, so it’s useful to have a plan for quicker profit-taking during cautious times.
Embrace the Surge,
Editor, Traders Daily Direction