Today I plotted the Nasdaq index with the Stockbee market monitor breadth from 2009 to December 1st, 2011. From the above chart, there are several things one can observe.
1. The bull market from March 2009 started with a big breadth thrust. The breath increased from less than 100 to around 1500 from April 2009 to June 2009. Every bull market should start with a consistent buying, which indicates by the spike in breadth thrust.
2. Look at several points on the chart --- Oct 2009, April 2010, November 2010. We can see that the spike is decreasing in magnitude, which indicated the buying pressure weakened over the long period. This is also a divergence chartist wants to see.
3. Then a lot of price/thrust divergence from December 2010 to April 2011. The price made a new high, but the thrust continued to decrease. This indicates the bull market is about to end. Then from April 2011 to July 2011 we see a V shape distribution. This is the last round bull attemped to try going higher.
4. As right now 12/04/2011, we can see from the chart that the thrust is not quite significant high. It is even lower than the November 2011 thrust high. If we will have another bull market, the thrust should continue going higher from what we have.
Why does the stockbee market monitor works? From the statistical point of view, it is because that the market monitor is highly linearly correlated with the index. There are a lot of market monitor tools to predict the direction of the market, but they all come to the same conclusion and the same cause.
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