Is Individual Stock Participation Confirming New Stock Market Highs?

Amidst the larger context of an equity market that seems to be way out on the teetering limb of a reflexive rally so full of its own bullish virtue that it might’ve finally jumped the V-Bottom shark, small cap benchmark index Russell 2000 (RUT)  – broadly shunned in favor of larger companies all year – has actually registered an expansion in upside individual stock participation over the past several sessions.

Below, the four colored lines plot “Composite Participation” against the Ishares Russell 2000 ETF (IWM) a study constructed by 1) averaging the percentage of Russell 2000 components above their 20, 50, 100 and 200-Day Simple Moving Averages (SMA), and then 2) smoothing that average with 5, 10, 20, and 50 Exponential (front-weighted) Moving Averages (EMA), rendering a noisy multi-timeframe view of index breadth into a simple “wave”. This composite measure is almost entirely above September’s high (only the 50-Day remains below) and beginning to encroach on early July’s levels, coinciding with R2k’s all-time highs.

A point of potential concern here is how the Russell 2000 has stalled out following last Friday, 10/31’s Bank of Japan/QQE-induced gap higher above Descending Broadening Wedge (DBW) resistance.  The 4 sessions since have created a potential multi-day Island Reversal, consisting of Friday’s gap-up and a series of comparatively tight, churning sessions with no directional resolution.  Island Top confirmation would come with a gap down that opens at or below last Thursday, 10/30/14’s close near 115.  This could be a Long Island pattern that will go on to spur a continuation higher; but the jury is out until this week’s range between 115.28-117.37 resolves.  In contrast, a gap low threatens to negate the DBW breakout if price falls back into the pattern – a technical event that often signals renewed weakness.

Applying the “Composite Participation” measure to the S&P 500 (SPX) on its weekly chart, the “larger context” mentioned above, we see another point of non-confirmation.  Here we see that the latest v-Bottom rally has induced a short-term reversal in individual stock participation on the lower timeframes.  However, for a price reversal that features a positive RoC (details here) greater than any rally since October 2011,  it reflects a very underwhelming response.

The net result: SPX makes a new nominal higher high (to the trend line resistance imposed by it’s multi-month Broadening Top pattern ) as the trend in individual stock participation continues to deteriorate.

This “price v. participation” negative divergence – one that has been building for over 18 months! – may prove an ephemeral concern if the latest V-bottom does prove to be a lasting refutation of the wobbliness in US stocks that has characterized much of 2014.  Over the last several months, though, it has become an escalating concern that will – at best – prevent SPX from meaningfully advancing until it is resolved.

Trade ’em Well.

Twitter: @andrewunknown

Kassen holds no exposure to securities/instruments mentioned at the time of publication.  Commentary provided above is for educational purposes only and in no way constitutes trading or investment advice.