[isatrader]

It's hard to say if it shows inherent weakness or just a lag that is more representative of the broad market position (see NYSE and COMPQ charts). As we don't have past data to compare against. However, it moves in similar ways as the advance decline data, and Percentage of Stocks above their Moving Averages. So based on those, the longer term measures like the 200 day are more useful as confirmation data imo, as the short term indicators give new buy signals earlier after a Stage 4 decline, and tend to move back to the tops of their ranges and then pullback towards the middle of the range on corrections, with not too much depth below the zero line on those pullbacks. So once we see all the time frames for the point and figure double top breakouts and double bottom breakdowns on buy signals then we'll likely be back in Stage 2 phase. So I think the fact that the 200 day longer term measure hasn't yet given a buy signal means that we are still operating in a Stage 1 phase.

On your questions.
1) Weighting is the key here. Indexes might be averages of the stocks in them but they are not equal weighted, so like you said can be moved by their largest components and distort the actual position of the market. This is why I like the breadth indicators so much like the point and figure double top breakouts and double bottom breakdowns, advance decline, and Percentage of Stocks above their Moving Averages etc. As they all show an unbiased view of the market strength, and so can be used to assess risk, and hence when to be more aggressive or more cautious with your portfolio.

2) That is how I play it, as I use these for risk assessment. So unless all the time frames, i.e 10 day, 20 day, 50 day and 200 day are all on a buy signal, then I tend to be much stricter. So for example, at the moment I'm only about 65% invested in my pension portfolio, and only have a single position open in my short term trading account.