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Breadth Shows U.S. Stocks Rally to Continue: Technical Analysis

U.S. stocks may rally after the ratio of rising to falling shares increased to an all-time high, according to Strategas Research Partners.

The advance-decline measure of companies listed on the New York Stock Exchange climbed to a record 95,875 on Aug. 4, according to data compiled by Bloomberg. The indicator, which represents the cumulative number stocks that rise minus those that fall, was set at zero on Aug. 20, 1996. It predicted rallies in July 2009 and February 2010, said Christopher Verrone, lead technical analyst at Strategas.

“It’s a significant development,” said New York-based Verrone. “Participation is broadening out. It’s telling us that breadth and momentum are expanding into the rally. The move that we’ve seen off the July low looks a lot healthier than the ones we’ve seen over the last couple of months. It argues for the market to continue to climb higher.”

The S&P 500 rose to a 19-month closing high of 1,217.28 on April 23 amid optimism about the economic expansion. The index fell as much as 16 percent through July 2 on concern that widening budget deficits in Europe could derail the global economic rebound. Since then, the gauge rallied 10 percent to 1,125.81 through yesterday.

“If we move through 1,131, the move through 1,173 definitely happens,” Verrone said. “As we approach that level, if the backdrop is still the same, you get set up into the back half of the year for a move back to that April high.”

Technical analysts such as Verrone use price and volume graphs to forecast whether securities will rise or fall.

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