Promising improvement in markets' bad breadth may have investors breathing better too

Advancing versus declining volumes are showing an improvement in the markets' breadth even as the market ticked lower the past week. For investors who have been holding their breath wondering when the market slide might be done - or at least, slow down - this is an encouraging sign. The reason why it can happen even with the market moving lower is that the amount of stocks being bought in rallies can be less than those being sold on declines (it also signals that stocks being bought are not sold quickly on the next decline, but held as more large investors are interested in holding longer - and for that matter, that large investors who were short the market, are buying in order to cover their short positions, as they perceive the market may have "fallen enough" for now).

Below are the McClellan charts of DecisionPoint that Stockcharts.com displays. The McClellans developed what's now known as the McClellan Oscillator and McClellan Summation Index - both being widely-recognized measures of advancing and declining volumes. These charts for the New York Stock Exchange (NYSE) and Nasdaq show that, not only do we still have relatively better breadth compared with the November 2008 lows, but there's been a recent improvement on a short-term basis as well even though the markets declined lower the past week. I marked a few lines on these charts, just to help you see where there's noticeable positive divergence in the McClellan Oscillator as well as their Summation 5%/10% Index:

The positive divergence in the McClellan Oscillator that I described, and have marked on the charts, signals investors that a rally is likely approaching. And furthermore, that the rally is likely to be "better" than the one we saw from November 2008 into the January 6 high. I say this because the Oscillator and Summation Index for both NYSE and Nasdaq remain above where they were in November 2008. This probably supports the reason why the VIX is also not as high currently, relative to where it was in November 2008. Of course - it's easy to conceptualize this when we realize that the banks have been at the center of all this, and they already had fallen so low by late last year that there just cannot be much more effect by the banks on the broader equity indices.

So - this is room for cautious optimism, and I recommend that investors and traders start to be open-minded about the prospects for a market rally soon. (Although some traders may prefer to await the buy signal when it crosses above the zero line - it depends on your style and which indicators you use). The McClellan Summation Index is used for longer-term views of the market, and so I'm not surprised it isn't "talking" yet - a bit early for that. For more information on the McClellan Oscillator and McClellan Summation Index, read my post Using the McClellan Oscillator and McClellan Summation Index at my trading education blogspot (link is always in the Welcome section, upper right side of this page) and you can also learn a lot at the excellent Stockcharts.com Chart School (website included in the "other sites of interest" at the right side of my blogspot pages).