I know I promised this last Friday, but I wanted to wait until we got Friday’s closing data in place…it will make today’s explanation ten times more clear. What I’m taking about is my use of breadth and depth in determining when the market has had enough - and is likely to reverse.

Truthfully, I could write a small book on the subject. Maybe I’ll do that over time. For today I just want to focus on one of my favorite breadth-and-depth scenarios - too many new lows.

I’ve actually discussed this idea before, and used it to make a couple of big calls about market tops and bottoms (see June 21, 2006). That’s not to say it’s perfect, but it’s better than throwing darts.

In simplest timers, the market has a way hitting a bottom in a most painful way. When an exchange’s - usually the NASDAQ or NYSE - ‘new low’ reading gets excessive, we can start to look for a recovery move.

Defining ‘excessive’ is the trick. There’s no pre-set number…it’s all relative, and even changes from one exchange to another. In general, anything more than 200 new lows for the New York Stock Exchange was a sign of capitulation, while anything more than 300 new lows for the NASDAQ meant a bottom had likely been made. Like I said though, you have to adjust for all kinds of variables.

Early January was a good example of why you have to take it all with a grain of salt - we saw the NASDAQ hit new levels in the 500’s for several days, yet the market just kept on sinking.

In retrospect, I think it’s less effective in a bear market than a bull market. That’s why the struggle in January. Regardless, the tool is effective even if imprecise…you just have to know when to have blind faith, and when not to.

By the way, the inverse - using too many new highs to spot market tops - is only somewhat accurate. That’s not entirely a surprise, as the natural tendency for the market is to not make tops, yet make bottoms. However, I have a feeling the ‘too many new highs’ tool will work far better in a bear market than a bull market.

I’ll look at other breadth and depth tools in the future. This one seems the most time-sensitive in light of Friday’s and Monday’s action.

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