S&P Shows Bullish Bias, But Breadth Is Deteriorating

Includes: DIA, QQQ, SPY
by: Prieur du Plessis

As seen in the chart below, the S&P 500 Index is still above a support zone in the 1,227 to 1,220 area (green lines). On Thursday the Index traded down close to this support near 1,227 and reversed.

Kevin Lane, chartist of Fusion IQ, said:

Lately the tape has absorbed some bad news and managed to buckle but not break. This is encouraging. With the Index still above support and its uptrend line from the sum­mer lows (blue line), we have to give the bullish bias the benefit of the doubt here. Secondary support lies in the 1,199 area (orange line). Again, as long as these levels are not violated one has to respect the current trend which remains up.

Click to enlarge:

Source: StockCharts.com

However, there are some warning lights as far as stock market breadth is concerned. According to Bespoke Investment Group, the S&P 500 is trading at the very top of its trading range, i.e. two standard deviations above the Index’s 50-day moving average.

But even though the market is this overbought, only 78% of the stocks in the Index are trading above their 50-day moving averages. When the Index has been at similar elevated levels over the past year, the percentage of stocks above their 50-day lines has typically been in the high 80s. The low reading this time around means not all stocks have been participating in the current rally, which is not a good thing.

Click on charts to enlarge:

Source: Bespoke Investment Group, December 17, 2010.

Source: Bespoke Investment Group, December 17, 2010.