Will the Nasdaq Bull Continue to Run? Analysis of Market Internals.

Many traders focus primarily on price movements. When the Nasdaq Composite ($NASX) reaches new highs, it is often assumed that the market is strong. However, as Barchart's Senior Market Strategist John Rowland, CMT, pointed out in a recent webinar, the true story lies not in the index itself but in the individual stocks that make it up.

Market internals provide a clearer picture of whether a rally is broad-based and healthy or narrow and at risk. At present, the internal indicators suggest a different story from the headline strength that everyone is celebrating.

The Importance of Breadth in Market Movements

Breadth refers to the number of stocks that are actually participating in a market movement. A genuine rally occurs when thousands of stocks are advancing together, reflecting true strength. On the other hand, when an index rises due to a handful of large-cap stocks carrying the weight, it is a potential warning sign.

John Rowland illustrated this point by comparing the Nasdaq 52-Week HighLow Index ($MADQ) with the Nasdaq Composite ($NASX). Since June, $MADQ showed increasing strength, indicating that more Nasdaq stocks were hitting new highs than lows. However, this trend recently reversed. While the index reached new all-time highs, the breadth turned negative, with more stocks declining than advancing.

This divergence between price and breadth often serves as an early, subtle signal that market momentum is weakening beneath the surface.

When Price and Breadth Diverge

A rising index paired with falling breadth has historically been a red flag, signaling potential reversals or heightened volatility in the market. While this does not necessarily indicate a market decline is imminent, it suggests that the foundation of the current trend is weakening.

For example, John pointed out a situation where the Nasdaq reached new highs while the number of new lows also increased. This kind of internal divergence is the type of signal traders should seek to identify early, rather than react to it after the fact.

How to Use Barcharts Market Momentum Tools

To track these internal signals in real-time, John demonstrated how to use Barcharts Market Momentum page. This tool provides a dashboard with key metrics such as:

• Advancing vs. declining issues
• Advancing vs. declining volume
• New 52-week highs and lows
• Percentage of stocks above key moving averages

These metrics give traders a daily snapshot of market health. For instance, when the number of advancing stocks dips below the number of declining stocks during a rally, or when 52-week lows increase despite positive headlines, it often indicates that market momentum is faltering.

Extreme readings, such as 80-90% of the market advancing or declining, can signal capitulation in investor sentiment, often preceding significant market turning points. This internal data is invaluable for traders who want to anticipate shifts and position themselves proactively, rather than merely reacting to market movements.

A Systematic Approach to Reading the Market

Instead of relying on headlines or price movements alone, John suggests a simple strategy to better understand the market:

1. Monitor the index trend
2. Compare it to breadth (52-week highs/lows, advancers vs. decliners)
3. Look for confirmation or divergence between price and breadth
4. Assess whether momentum is strengthening or fading

While price reflects where the market stands today, breadth indicates whether that movement is supported by solid underlying trends. When price and breadth are in conflict, breadth tends to be the more reliable indicator.

What This Means for the Nasdaq Rally

Although the Nasdaqs rally appears strong at first glance, internal data suggests a different picture. The number of stocks making new lows is rising, and market participation is narrowing. Internal weakness is starting to build up, even as the index continues to climb. While this doesnt necessarily signal the end of the rally, it does suggest that traders should be on alert for potential volatility or pullbacks.

Traders can use Barcharts Market Momentum page to track these signals and monitor breadth indicators, as John Rowland does in his approach. For those looking for an edge that many traders overlook, understanding market internals is a key starting point.

Watch the full webinar on Hidden Market Signals

Analyze breadth using Barcharts Market Momentum page

Sources:

• Can the Nasdaq Bull Keep Running? Here’s What Market Internals Are Telling Us Now.