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9 December 2007
The rally that started just after Thanksgiving should continue at least until early January. My favorite and most reliable two indicators for timing market bottoms won't run out of steam until then. Since these indicators are simple 30 day moving averages, we can peer ahead by looking at the numbers that will be getting dropped. For the coming week we have some moderate positives being dropped but since the indicators are so heavily in negative territory the indicators should continue to rise throughout the week. Then, starting on following week, we start dropping a long string of large negative numbers representing over 3 weeks of data. This means that these two indicators should continue rising for the next 4 weeks.
The indicators are the weekly breadth and the weekly volume breadth. For the first, in Excel, the columns are A=date, B=# advancing issues on the NYSE, C=# declining issues on the NYSE, D=B-C, E=sum(last 5 Ds), F=average(last 30 Es). For the second, weekly volume breadth, columns B and C contain advancing volume and declining volume respectively, otherwise the indicators are computed the same way.
By plugging in zero, a neutral reading, for column D for each of the next 5 days, we can see what to expect for the coming week.
For the weekly breadth (advancers - decliners)
We can see that the upward trend starts to wane toward the end of the week, but then starting on the 17th we start dropping the following string of negatives: -2262, -4252, -3996, -6218, -6809, -5793, -5356, -4660, -1955, -1891, -2435, -3297, -5403, -7617, -3903, -4258, -3147. This should cause the indicator to rocket skyward.
For weekly volume (up volume - down volume)
This also pauses by the end of the week, but then we will start dropping this string of negative numbers: -20875, -9667, -33241, -16924, -22176, -19623, -12067, -1900, -11488, -3243, -11151, -26089, -32515, -17830, -29764, -8191.
The charts above are the only ones that suggest a minimum duration to expect for this rally. They do not give any indication as to the size of the move, only the markets direction and how long that direction should be maintained. These indicators are very good at timing market bottoms but not market tops. Once these indicators start declining, they show internal weakness in the markets, but the markets often continue climbing for some weeks afterwards.
The chart of the 10-day and 30-day moving average of upside volume as a percentage of total volume on the NYSE is taken out to the end of the week by plugging in a neutral 50% reading for the next 5 days. This indicator suggests that the markets may take a breather toward the end of the week. The blue line is the 10-day moving average and the pink line is the 30-day.
The next chart shows the ratio between the 20 day exponential moving average (ema) of the volume on the preceding up days versus the 20 day ema of the volume on the preceding down days for the SP-500. This has finally moved over 100% which shows a healthy market.
The remaining indicators that follow are shown through this past Friday. There is no attempt to "look ahead" by plugging in neutral numbers. But we can look at where the indicators are and compare that to what the indicators have traditionally done at previous market bottoms.
The CBOE Equity Put/Call Ratio which can be downloaded from http://www.cboe.com/data/PutCallRatio.aspx. We can take and graph the 30-day moving average of this ratio. It moves inversely to the markets. This indicator rises as the markets fall and falls when the markets rise. It has just so gently started to decline.
The percentage of stocks trading above their 50 day moving average usually reaches at or above 80% before a market top occurs. We have quite some ways to go and 4 more weeks of market rally could easily get us there.
The bullish percentage on the SP-500 usually gets to at least 75% (though the last rally from August to October only brought it up to 70%) before a market top establishes itself. This too has a long way to go.
The (15,9) TRIX of the SP-500 has just curled upward and has a long way to go before reaching the levels that it normally reaches before a market top occurs. The graph below show the TRIX below the SP-500. The TRIX is the percentage change in the 15-day average of the 15-day average of the 15-day average, that is the black line. The red line is the 9-day moving average of the red line. Traditionally a bullish signal is given when the black line moves above the red line.
Normally the market doesn't top out until after the TRIX has gone positive. It still has a long way to go, though 4 weeks could easily get it there.
And lastly is one of my favorite indicators, the McClellan Summation Index (MSI) which is based on the 19 and 39 day moving average of market breadth. For a more detailed explanation of the MSI see http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:introduction_to_mark#bullish_percent_index_bpi
The MSI is currently rising strongly so it would take more than one down day to reverse the indicator. Further, the indicator has only just started its upward journey and normally gets to at least 600 or so before switching course. Also, the major runs in the indicator normally last 6-8 weeks before petering out.
In Summary: Although the market may take a breather later in the week, the overall market direction should be up over the course of the next 4 weeks. So, "Yes, Virginia, there is a Santa Claus." |
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