The recent market momentum is relentless. The amazing market move up from the depths of despair just before Christmas is now within striking distance of all-time highs. One has to wonder how much longer this rally can continue. For those who believe they can 'predict' the next move, they are often going to be wrong. In fact, this time around the markets made fools of those who had expectations of a pullback or increased volatility recently.
Momentum is powerful, and with so many participants in the markets these days it is hard to get the giant ship to turn the other direction. Investors have funds in ETF's, mutual funds and stocks. Trillions of dollars of directional bets are most likely up. Money flows dictate the direction of the market as behavior to add more funds or not are made each and every day.
We look at the best information we can with signals that tell us when that momentum may be ending, perhaps just temporarily. Remember, markets don't go straight up forever (though some may disagree by looking at a very long term monthly chart).
There are various ways to interpret market action and momentum is the one variable that can be explained with some precision. Price action is the chief indicator, THE most primary of them all. If prices are rising and turnover is increasing, that is clearly bullish. Now, that seems rather simplistic but it's really not that difficult to see. If all you had was price and volume, you could read the market action pretty well.
However, I like to go a bit deeper to see more of what is happening. Like an auto mechanic, just listening to the engine doesn't tell the entire story. He needs to look further and diagnose a problem. For a chartist/technician, the breadth is the best of the 'other' indicators that signal the strength of the market move.
Since after Christmas, the breadth indicators have been uber bullish and have STAYED that way for weeks. They have driven markets to substantial gains in a short period of time. This has been just breathtaking. At some point that will fail to drive the markets higher. The 'gobs of breadth' that bring the herd into the game and off the sidelines. Those who see the markets rising day after day will no doubt force themselves back in.