INDU, SPX update part 3: the case of extreme market breadth readings over the past 2 years

This post is part of several other posts: part 1 and 2, which can be found here and here. One of the things I.I. tracks is market breadth using several indicators. One of these indicators is Zweig Breadth. It is a great indicator, where a thrust (ZBT) event signals a new uptrend as a new kick off wave propelling the market to new highs has commenced. This has happened 3 times since the 2009 low: during Major 1 of Primary I. During Major [1] of Primary III and during minor 3 of intermediate (v) of major [3]. The last wave was an extended fifth wave (started in September 2013 and last likely for a year till the SPX 2019 high). See, all are kick off waves.

However, since the SPX 1821 low the criteria for a ZBT have not been met. This means the rise off the 1821 low was likely not a kick off wave. Instead ZB peaked last Friday above 62, and declined slightly since, which is not surprising since a reading over 62 is extreme and has only happened 5 times over the past 2 years.

(click to enlarge)

ZB 11032014

 

Question now is, how has prices fared after such an extreme ZB reading?

Well, one of these five >62% readings was a ZBT. Given that, like now, at the four other occasions now ZBT event occurred, it be fair to compare only these four past >62% readings with the current reading >62%:

  • May 8, 2013: the SPX was at 1632, added 55 points in 2 weeks (1685) before dropping to 1560 in the following 4 weeks, thus erasing all gains since that ZB high.
  • July 11, 2013: the SPX was at 1675, added 35 points (1710) in about 3 weeks, before dropping to 1627 in the following 4 weeks, thus erasing all gains since that ZB high.
  • September 18, 2013: the SPX was at 1725, added no points, and dropped in 3 weeks to 1646.
  • February 18, 2014: the SPX was at 1840, added ~40 points in 6 weeks (1897), before dropping to 1814 in a matter of a few days.

Hence, the past 24 months’ study shows that the chance of more upside is greater than a direct decline from current price levels, but that in all cases all gains were entirely erased within a matter of weeks. This would fit well with a major 5 wave (or an intermediate v wave) off the SPX 1821 low, where either Primary IV or Major 4 will erase (almost) the entire uptrend off that same low. Of course past performance is no guarantee of future results, but please be aware of this.

This study also coincides well with the re-adjusted counts (part 1), and the Megaphone pattern where [5]=[1] would target 2040ish (part 2). Hence, using a 3-tiered approach I hope to have given a thorough analyses of where the market may had next. Until then: anticipate, monitor, adjust.

Advertisements

2 thoughts on “INDU, SPX update part 3: the case of extreme market breadth readings over the past 2 years

  1. Pingback: SPX, INDU update part 2: the case of a possible megaphone pattern | Intelligent Investing

  2. Pingback: INDU update part 1: the case of 3 counts | Intelligent Investing

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s