Participation On The NYSE Narrows

10/11/05 07:32:46 AM

by Arthur Hill

The NYSE Composite moved to new highs in September, but not as many stocks participated as before -- not a good omen.

Security: NYHI
Position: Hold

This breadth indicator shows the 10-day exponential moving average (EMA) for net new highs on the NYSE (52-week highs less 52-week lows) (Figure 1). It is a measure of breadth that reflects broad market participation. In general, readings above +200 show broad strength and good breadth. Readings below -200 show broad weakness and bad breadth. It is important for breadth to keep pace with the underlying index. Failure to keep pace shows underlying weakness that could come back to haunt the index.

FIGURE 1: NEGATIVE DIVERGENCES. There have been two negative divergences in a year -- the first occurred from December to March, and the second from August to September.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

NYSE breadth continues to deteriorate as fewer stocks (new highs) participated in the August-September advance and more stocks participated in the October decline (new lows). The 10-day EMA for net new highs peaked around +300 in early August, but only reached +170 in mid-September. This produced a negative divergence as the NYSE Composite moved to a new high. As noted, this negative divergence shows underlying weakness in the rally and should be some cause for concern.

This is the second negative divergence in a year. The first negative divergence occurred from December 2004 to March 2005, and the second from August to September. The indicator turned negative in late March, and this led to weakness in the index until mid-May. The indicator turned negative again this month, which shows that new lows are outnumbering new highs. This is clearly a sign of weakness, not strength.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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