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.
(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.
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.