AI Summary
This video shifts focus from individual trade reviews to a broader market analysis technique using a breadth indicator. The presenter explains how monitoring the advance/decline line helped them reduce risk before a market dip on August 1st, and they outline their ongoing approach to managing position sizes based on this indicator.
Chapters
The video is not about reviewing a specific trade but about analyzing the overall market to decide whether to go heavy or reduce risk.
The presenter introduces a series on breadth indicators, starting with the advance/decline indicator, which measures the number of stocks moving up versus down in an index.
By August 1st, the presenter had already reduced trade size because they had been analyzing the breadth indicator, which showed market weakness before the dip occurred.
The breadth indicator is defined as the amount of stocks in the index moving up divided by the number moving down. The S&P 500 was rising, but beneath the surface more stocks were declining.
The presenter uses three moving averages (13, 34, 55) to represent short, medium, and long periods. When all three are aligned downward while the market rises, it signals weakness.
In a previous dip, the short-term highs were flat, but medium and long-term averages were rising, showing no divergence. In the current case, all three are aligned, indicating a weak market.
Due to the aligned weakness, the presenter closed the weakest positions and reduced the strongest ones, which was followed by a market pullback.
As of today, there are additional dips, suggesting the weakness is not over. The short-term trend is still down, and the long-term trend is also pronounced.
The presenter believes the weakness is not over and has been trading with lighter positions since that day.
The presenter mentions they will provide details on how to create this chart in thinkorswim on their Substack.
The key takeaway is that breadth indicators like the advance/decline line can provide early warning signals of market weakness, allowing traders to reduce risk before a downturn. The presenter plans to continue this series and share chart-building details on Substack.
Mentioned in this Video
💡 Key Takeaways
Early Warning Signal
Demonstrates how breadth analysis can predict market dips before they happen.
00:35Breadth Indicator Definition
Provides a clear, testable definition of the advance/decline indicator.
01:05Divergence vs. Alignment
Explains a key distinction that helps traders avoid false signals.
02:03Risk Reduction in Practice
Shows a concrete application of the indicator to manage position sizing.
02:31Full Transcript
[00:00] Hello everyone, today I'm going to be talking about something different. This is not about reviewing a trade or ideas. This is more about how to analyze the marketing overall and deciding if I need to go heavy
[00:18] or reduce my risk. In this case I'm going to analyze this breadth indicator. I'm going to be doing a series of videos about it. this case is going to be only the advance and decline indicator if you go back to august 1st
[00:35] for example you see this dip that happened in the market by the time that this happened i already reduced my size on my trade why was that you can see i have a deep here we have the deep in the
[00:50] market before the reason is because i was analyzing i'm always analyzing the breadth indicator and in this case this is something that i do on the weekends maybe every two weeks not frequently
[01:05] but by the time that the dip came to the market i already knew that the market was weak in this case the breadth indicator is the amount of stocks in the index that are moving up
[01:21] divided by the number of stocks they are moving down how you can see here the stock market in overall the s&p 500 was moving up up up but beneath the surface more stocks were going down
[01:36] that were going up and in this case i show um an average line for the breath indicator in this case is a 13 34 55 short very short period medium period a long long period you can see the stock market is going up but then I see all these arraignances going down and they are aligned in the three periods
[02:03] short medium and long because you can make the case that in the previous dip it was happening the same thing but it wasn't the case you see these highs they were at the same level in the short term
[02:18] but in the medium term and in the long term, it was going up. So no divergence at all. So let me put it back. In this case, they are aligned and the market is weak.
[02:31] So for that reason, I decided to take less risk, close some positions, the weakest one, and reduce the strongest one. And what happened? Yeah, we have this pullback deep in the market.
[02:45] Now, this happened on August 1st. If I go to a day today, we have another dip happening here and another dip happening here.
[02:57] So the weakness is not over. You can make the case that it's still going down in the short term. Not much in the middle term, but in the long term, it's also pronounced.
[03:13] Is the weakness over? I don't think so. for that reason since that day I'm trading with lighter positions if you like it let me know I'm gonna be putting all the details of how to create this chart in thinkorswim in my sub stack
[03:45] .