Interpreting Market Health
The Complete Picture
Individual indicators tell stories. Combined, they reveal truth. Market health isn’t binary. it’s a spectrum measured across multiple dimensions simultaneously.
Professional traders synthesize breadth, momentum, sentiment, and structure into composite health scores. This article shows you how to build that intuition.
The Health Check Framework
Trend Health
Price action: Higher highs and higher lows (bullish)
Moving averages: Price above key MAs, MAs sloping up
Breadth: A/D Line confirming price direction
Momentum Health
RSI: Not extreme, room to run
MACD: Histogram expanding in trend direction
New highs vs lows: Expanding in bull markets
Participation Health
% stocks above 50-day MA: 50-70% ideal
Sector correlation: Most sectors participating
Volume: Increasing on rallies, decreasing on declines
Warning Signs of Deterioration
Early Warnings
A/D Line diverges from price (new price highs, lower A/D)
Defensive sectors begin outperforming
New highs contract while index rises
Volume fades on rallies
Advanced Warnings
% of stocks above 50-day MA falls below 50%
McClellan Oscillator negative for extended period
High-yield credit spreads widening
VIX term structure inverting
Critical Signals
A/D Line breaks major support
90% of stocks below 200-day MA
Credit markets freezing
Breadth thrusts to the downside
Action Framework by Health Level
Healthy Market (75-100% Score)
Full position exposure
Favor growth and cyclicals
Buy dips to key moving averages
Tighten stops on extended positions
Neutral Market (40-75% Score)
Reduce to 75% exposure
Balance growth and value
Wait for clearer setups
Wider stops, smaller position sizes
Unhealthy Market (0-40% Score)
Reduce to 25-50% exposure
Favor defensives and cash
Avoid new long entries
Consider hedging or short exposure
← Previous: The TICK and Short-Term Extremes
Series Complete: Market Internals
You’ve learned the Advance-Decline Line, Market Breadth Signals, Sector Rotation Dynamics, The TICK, and how to synthesize everything into Market Health interpretation. You now see what most traders miss. the true condition of the market beneath the headlines.
