Market Breadth update: oversold but no turn in sight yet

Price trumps everything, but looking under the hood helps understand the market’s next move as well. Market breadth can help us in identifying buy-able bottom levels. First up the well-known McClellan Oscilator (MO) for the NYA: NYMO, is starting to reach the “critical” -40 level.

sc (2)(Click pictures to enlarge) Below this level is when often -at least over the past 5 years- what I call “buy-able bottoms” form. Below that, at -60, is even a better bottom value. Hence, that’s maybe why Tom McClellan himself turned bullish today on the market ? Click here to read.

Next up is the Summation Index (SI). While the MO is more for shorter term set-ups, the SI is generally used for medium-term and long-term timing. When the MO is positive the SI goes up, when it is negative the SI goes down. + MO and + SI values favor bulls, – values favor bears. The bullish threshold is here set at +500 and the bearish threshold is set at -500. I’ve shown the MO for the SPX.

sc (1)

A long-term bull signal is triggered when the SI moves above +500 and remains valid until the index moves below -500. Similarly, a long-term bear signal is triggered when the SI moves below -500 and remains valid until the index moves above +500.  The latter happened in October, where the SI went from just below -500 to almost +1300 in a matter of weeks. Hence, the long-term bear signal was erased, and a long-term bull signal was triggered. Since then, however, the SPX-SI has dropped, but is still now entered oversold territory and has dropped below the critical 500 level. As long as it remains above -500 it favors the bulls. In this case, it’s still above 0 and according to the RSI5 is now in OS territory. However, this has happened prior over the past 5+ years, and it can get more OS. BUT, each of OS levels and SI’s below 500 resulted in buy-able bottoms.

In conclusion: market breadth is nearing levels that during this current bull market coincided with what I call “buy-able bottoms.” However, the indicators show no sign of reversal yet, or that a bottom of sorts is in. Once these indicators change direction we can be much more confident a bottom is in.

 

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2 thoughts on “Market Breadth update: oversold but no turn in sight yet

  1. Pingback: Market breadth turned the corner this week | Intelligent Investing

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