Study: what happens next when breadth reverse down

The stock market’s breadth on Wednesday was very positive because the stock market rallied, with Up Volume exceeding 85%. The stock market’s breadth on Thursday was negative because the stock market fell, with Up Volume below 30%.
In other words, this was a very quick reversal in breadth. Let’s examine the historical cases in which breadth quickly reversed downwards.
Here’s what happens next to the S&P 500 (historically) when…

Up Volume was above 85% yesterday and below 30% today, while…
The S&P 500 is above its 200 moving average (i.e. is in an uptrend)

Click here to download the data in Excel


The stock market might have a little more downside (see 1 day forward returns), but the downside is limited. The stock market has a bullish bias on a 1 week – 1 month forward basis.
There’s something else I’d like you to note. Notice how these extreme reversals in breadth were not common before the 2000’s. Extreme readings in breadth are becoming more and more common nowadays due to the rise of ETFs and decline in stock picking. When a trader/investor sells an ETF like $SPY, every single stock gets sold. When a trader/investor buys an ETF like $SPY, every single stock gets bought.
This is why we underweight the importance of breadth indicators.

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