The strength of this market is the strength of this market

By Kevin Marder

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Shares are on track for further upward revaluation, as the health of the average stock remains the key takeaway from recent market action.

Last week's report emphasized "... that a few breadth measures are now showing more health than they did in 2015 ."

The report went on to discuss three popular measures of average-stock health: the percentage of New York Stock Exchange issues above their 200-day moving average (at levels not seen in nearly two years), the cumulative daily NYSE advance/decline line, and the number of NYSE 52-week highs (the highest in 26 months).

A fourth breadth measure, the 10-day net high/low differential, is shown below. This indicator, popularized by the great technician Justin Mamis, and rarely discussed anywhere, takes the difference between each day's 52-week highs and lows, and then smooths the result with a 10-day moving average. The resulting indicator is a good proxy for the average stock.

Like other measures of breadth, divergences between a major average such as the Dow Jones Industrial Average or S&P 500 and this indicator provide a good picture of the technical health of the market. (Years ago, prior to the advent of charting software, this trader would plot the 10-day net high/low differential on a sheet of graph paper each evening.)

For a larger chart, please click here .

The chart above shows the indicator diverging from the S&P in April-May, presaging the July-August downdraft in the averages. A second example of the value of this measure can be seen in February. Then the indicator showed uncommon strength amid weakness in the S&P. This positive divergence led to the booming February-April market advance.

What is this intermediate-term indicator saying now? As the chart above shows, both the indicator and the S&P are setting new highs. The market generally does not get into trouble when it is "in gear" like it is now.

It is when the average stock begins deteriorating beneath the surface of the major averages that market health takes a turn for the worse, usually leading to a major correction or outright bear market.

As for the Nasdaq Composite, the chart below shows a distinct contraction in volatility (the intraday high/low range) over the past five sessions. This is not a surprise after the index broke through the top of its consolidation area without much of a pause prior to.

This shrinkage in volatility and dry up in Nasdaq volume this past week indicate a modicum of profit-taking in the wake of the index's 10.3% run-up on an intraday basis post-Brexit.

For a larger chart, please click here .

A market in which leading stocks break down on their charts is a market usually treading on thin ice. Currently, leading stocks expected to post hefty earnings growth in 2017 have tended to act well post-breakout. Examples are Abiomed /zigman2/quotes/202106417/composite ABMD -0.02% , Acacia Communications , MKS Instruments /zigman2/quotes/208573663/composite MKSI +2.51% and Yirendai /zigman2/quotes/201030587/composite YRD -0.86% .