A Rare Technical Signal Has Stock Market Bulls Cheering. Here’s How It Works

Stocks closed higher on Thursday, with the S&P 500 notching its third consecutive gain and officially emerging from correction territory. However, what really has investors buzzing isn’t just the recent rally — it's the activation of a rare bullish technical signal that suggests equities could be setting up for a stronger performance as the week wraps up.

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The surge in stocks picked up momentum earlier this week after President Donald Trump announced that tariffs on Chinese imports were expected to come down from their current level of 145%. Additionally, Trump reassured markets by stating he had no plans to remove Federal Reserve Chair Jerome Powell, easing concerns over political interference with monetary policy.

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One aspect of Thursday’s rally that particularly encouraged market bulls was its broad participation. A large majority of stocks moved higher, leading to the activation of a little-seen but highly regarded technical indicator known as the Zweig Breadth Thrust. This signal, named after the late legendary investor and market timer Martin Zweig, has historically been viewed as a strong bullish sign when triggered.

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Dean Christians, a senior research analyst at SentimenTrader, explained the mechanics behind the Zweig Breadth Thrust. It measures the ratio of advancing stocks to declining stocks on the New York Stock Exchange (NYSE), using a 10-day exponential moving average to smooth out short-term fluctuations. For the signal to trigger, the measure must rise from below 40% to above 61.5% within ten trading sessions or fewer.

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According to Christians, when the Zweig Breadth Thrust appears during a downtrend, it often signals that the broader market trend is reversing. Although this doesn’t guarantee an immediate, smooth rebound, historical patterns show that stocks typically perform better over the next six to twelve months.

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However, Christians also warned that short-term volatility is likely to persist, especially given the lingering uncertainty surrounding tariffs and the global trade environment.

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Mark Newton, head of technical strategy at Fundstrat, emphasized that the historical performance following a Zweig thrust is quite strong. Newton pointed out that past instances of this signal usually led to impressive gains, particularly over the following year. Since 1982, the S&P 500 has risen in all 10 instances within 12 months after a Zweig Breadth Thrust was triggered.

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Still, Newton and other technical analysts caution that while the longer-term outlook appears more positive, investors should brace for a potentially rocky road in the near term. Newton noted that weekly momentum indicators remain negative and that the technical structure of the market still needs considerable improvement.

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"While this helps to confirm that the April lows are likely in place, much work remains to solidify a stronger technical foundation," he wrote, describing the current signal as supportive of an intermediate-term bullish outlook.

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Christians also reminded investors that not every Zweig signal comes without risk. He referenced the 2015–2016 market correction, where despite a Zweig Breadth Thrust, equities experienced only a modest rally followed by a significant pullback.

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Christians suggested that a similar scenario could play out today, particularly if progress on trade agreements stalls or if economic data shows further weakness resulting from the initial impact of tariffs.

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In that earlier episode, the S&P 500’s rally peaked at a 4.8% gain after the Zweig signal before retreating sharply, with a maximum pullback of over 9%. If history repeats, a comparable gain now would lift the S&P 500 toward its 200-day moving average, around 5,747, before potentially facing renewed pressure.

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Adding to the cautious voices, technical analyst Tom McClellan, editor of the McClellan Market Report, expressed skepticism about the strength of this particular Zweig signal. In his Friday commentary, McClellan suggested that the current rally might simply be a typical bear market countertrend move that could lose steam quickly.

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McClellan, who had been bearish for the previous seven sessions, recently shifted to a neutral stance on short- and intermediate-term trading cycles. However, for longer-term trends, he remains firmly bearish, warning that the broader bear market has not yet run its full course.

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While the emergence of the Zweig Breadth Thrust provides a hopeful signal for bulls looking for a turnaround, seasoned analysts agree that investors should stay alert for continued volatility and prepare for the possibility that the market’s recovery path could still be uneven.

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