Fosback Absolute Breadth Indicator Shows the Oversold Condition

The disruption of the financial markets brought about by the Bank of Japan raising interest rates on July 31 has ushered in some big daily breadth numbers.  And those big numbers have been in both directions, up and down. 

Years ago, famed analyst Norman Fosback created an indicator to look at what it means when breadth numbers get really big.  The Fosback Absolute Breadth Ratio ignores whether breadth numbers are positive or negative.  It only cares how big they are.  And it turns out that the recent average size of the daily breadth data can be really useful, when it gets to an extreme.

The large breadth numbers we have been seeing results in a high reading for Fosback's indicator.  And these high readings are reliably associated with important bottoms for stocks.  This makes sense, because the bottoming process for stock prices tends to be violent, sometimes with false snapback up days.  But tops are much quieter events, and so we see the breadth numbers calming down, resulting in very low readings. 

When the Fosback Absolute Breadth Ratio is in the middle of its typical range, it does not tell us much of anything.  This is an indicator which only gives useful information when it gets to extremes. 

Now, like any other oversold or overbought indication, an extended reading is just a "condition", it is not a "signal".  While such a condition reliably does matter, it does not have to matter immediately just because we may notice it.  The current reading is not the highest ever, but it is high enough to mark a good price bottom.  And I am talking about more of a bounceback than just one or two up days.  I wish I could assign a more quantitative statement than that, but that is not how the market works.  Sometimes the highest reading seen on a spike like this comes after the lowest price low, as the big breadth numbers leading the market upward out of that low keep pushing this 21-day simple moving average higher.