Market Update: Gauging the Breakout Move

Note: I will return to full daily market updates, along with links and market context, on Friday in the Trading Psychology Weblog.

After two days of unconvincing consolidation, we broke to the upside on Wednesday in the wake of Fed comments. The gauge of any breakout move is twofold: 1) we look for breadth as well as price strength, as those rising tides that lift all boats are more likely to be sustained; and 2) we look for the first pullback after the initial upthrust and see if the market can hold that level on subsequent selling. Those two conditions make for bull trend days.

Breadth was certainly present, as advancing issues outnumbered declines by over 2400 issues on the Big Board. I notice that my measure of Demand was a very, very strong 243; Supply was only 14. For those not familiar with this Weblog measure, it means that the number of stocks displaying significant upside momentum outnumbered those with significant downside momentum by a ratio of about 17:1. With this upthrust, we now see 46% of S&P 500 issues above their 50-day moving averages--not a level normally associated with market tops.

The usual pattern is for such broad strength to continue in the near term. Twice during the recent correction that did not happen after we had big up days. Nonetheless, as long as we see prices hold above that initial pullback level and the number of stocks making new highs expand, we have to go with what the market tells us on those big breakout moves.