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Market Breadth Page in Pro-Setups Dashboard - Does it work?

This post is a reminder for us to not skip the Market Breadth page in order to avoid ugly drawdowns. That’s one way I believe could have helped in avoiding the messy drawdown that probably most of us have had this month.

Market Breadth Info in our Pro-Setups Dashboard

The Market Breadth page in our Pro-Setups Dashboard has charts that show the percentage of stocks above 10EMA, 30EMA, & 50EMA, along with certain other data.

The chart is displayed as an oscillator with a reading from 0 to 100. For identifying extreme levels, the market can be said to be oversold when the reading is at the bottom of the chart (0-15), or overbought when the reading is at the top of the chart (80-100). In other words, for extreme levels, when the number of stocks that are below moving averages is less than 15%, you can consider that to be oversold levels, and when the number of stocks that are above moving averages is more than 80%, you can consider that to be overbought levels. The overbought and oversold zones have been highlighted in red & green respectively.

Typically, when the reading is overbought across all three EMAs, the price could see a time as well as price correction during the cool-off phase. Since the 10EMA is the fastest of all, it reaches the overbought & oversold zones frequently, as compared to the 30 & 50EMAs. If in such a case, 30 & 50 EMAs are not in overbought zones, the bullish trend can continue, though with a slight pause.

With the knowledge of these readings, one can anticipate what can happen next in the overall market. You may decide not to make big bets, or tighten stop loss for existing positions in case of overbought levels. Also, the readings work best around extreme levels when all three moving averages are seen at extreme levels at the same time.

Let’s see if it worked in the past.

Following is the chart of Nifty500 for the last year, (divided into two parts - Dec 2021 - May 2022, and May 2022 - Dec 2022), marking the dates of turns. Then we have the Market Breadth page from our Dashboard, marking the same dates on the charts.

Dec 2021 - May 2022

Nifty500 index
Nifty500 - Dec'21 to May'22
Market Breadth for swing trading
Market Breadth - Dec'21 to May'22

June 2022 - Dec 2022

Nifty500 index
Nifty500 - June'22 to Dec'22
Market Breadth for swing trading
Market Breadth - June'22 to Dec'22

If you match the market breadth stats with the swing highs & lows of the Nifty500, you will notice that the index turned when the breadth was near the extreme levels. Not just once, but multiple times.

And the writing was on the wall in the first week of December 2022, when all percentages of 10, 30 & 50 EMAs were near the overbought levels. If we had followed this reading, we could have avoided the drawdown to a large extent.

I am not saying that the Market Breadth page is enough for us to decide whether to exit completely or partially. Let’s say that when you reach the extreme overbought levels, your breakouts will start failing, the DCR data will start showing a higher percentage of stocks with DCR <30%, number of pocket pivot signals will start falling compared to previous days. Knowledge of certain candlesticks can also help in analysis. There will be a breakdown of 10 or 20EMAs, a breakdown of trendlines on shorter timeframes, or you will start noticing the first lower high, etc. That will be the time to consider the complete exit or booking majority gains or stop taking new long entries or going short.

I have written this post for swing traders, not for long-term investors or intraday options traders.

What next?

Right now, we have entered extreme oversold levels, with just 4%, 8%, and 15% of stocks above 10, 30, and 50EMAs respectively. This calls for a bounce here in the overall market.

Individual behavior of existing positions must be seen in how they react in such a bounce, whether they regain previous important levels. For new positions, only those stocks should be considered which have high weekly and monthly relative strength, strong recent quarterly performance, and belong to strong industry groups. And for all that, we have our Dashboard. If this bounce is going to take us to All-Time Highs (we have to be optimistic), these stocks will be gaining the most.

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