Market Breadth Shows Stock Sell-Off Not Over And Could Have More Weakness Ahead

Despite the S&P 500 (SPX) has come down nearly 10% off the peak in this month, with stock market breadth continues the downtrend since May 2021, there is no sign of market bottoming. Having said that, SPX is definitely oversold with climatic down move and wide price spread, which is likely to experience a selling climax soon before an automatic rally kicks in.

Detailed price action analysis with the Wyckoff method on S&P 500 Futures will be shown later. First, take a look at the relationship between SPX and the market breadth below to derive some useful market insights.

Using Stock Market Breadth to Spot Market Bottom

The market breadth as shown in the bottom pane of the chart is the percent of stocks above 200-Day average. There is a clear divergence between the market breadth and the SPX since January 2021 where the SPX forms a higher high while the market breadth forms a lower low.

This divergence means less stocks are participating the uptrend, which is not a healthy sign for a bull market. The divergence serves as a red flag and not a signal or confirmation for a reversal of the uptrend because the price action is still the final confirmation.

The market breadth chart is divided by 3 orange lines at 70%, 50% and 30%. The key is to pay attention to the 50% level. When the market breadth comes down and fails to bounce at the 50% level, there has been a strong pullback or correction in SPX as seen in 2014, 2015, 2018 and 2020. The level at 50% acts as a support. When there are less than 50% of the stocks above 200-Day average for some time, the uptrend of SPX is unlikely to hold hence a pullback or correction happens.

The first time the market breadth dipped below 50% support level in September 2021, it managed to climbed above in October 2021. The second time it dipped below the support level in November 2021, there were 3 attempts to rally above but none of them able to even test the 50% level. The inability to reclaim above the support level spells trouble ahead for SPX.

Based on the past data, once the market breadth failed to reclaim the support level at 50%, it dipped below the 30% level, which is considered as an oversold level. A dip below the 30% level followed by a reclaim above (annotate in green) marks the market bottom except in 2018.

Even in 2018, it also marked a temporary bottom with an upswing followed in SPX despite there was a final capitulation in December 2018.

Now, the market breadth is at 31.3, which is yet to dip below the 30% level, could suggest more weakness ahead in SPX until a selling climax occurs followed by a technical rally. During this transition period, likely there will be sector rotation in the stock market where the money managers take the opportunity to re-balance and re-position their portfolios and rotate the funds to the outperforming stocks.

S&P 500 Price Prediction with Wyckoff Method

Based on the characteristics of the S&P 500 E-mini Futures (ES), a sign of weakness (SOW) broke below the up-sloping trading range with increasing supply since 13 January 2022. The down wave comes with increasing price spread and climatic move, which are part of the characteristics before a selling climax and a technical rally show up. Refer to the chart below for the potential bearish scenario.

An estimation of the price targets of S&P 500 based on the Point and Figure (P&F) chart is shown below:

A first segment (annotated in orange) is used for the estimation and the projected price target is 4020-4240. This means there is “enough fuel in the tank” for the distribution based on the Wyckoff’s law – Cause and Effect. It does not mean the price must come down to the price target.

Ultimately, it is essential to refer back to the price action of S&P 500 and its characteristics to confirm the price movement. Based on the market breadth data, price volume analysis and the Point and Figure price target prediction for S&P 500, it seems like the sell-off is not over yet. The odds are still in favour of the bear. Visit TradePrecise.com to get more market insights in email for free.