Overbought and Breaking Out
By
Rennie on Thursday, September 17th, 2009 at 2:12 am
When you’re wrong, you’re wrong. A number of short-term sell signals triggered over the past two weeks have been run over by this rally. I still have short-term sells on the board, but it’s difficult to embrace the downside when there’s such obvious momentum on the upside and a virtual ‘sellers strike’. New 52-week highs surged to over 350 on the NYSE, the highest level since October 20007 and near the key 400 level (more on this later). Cumulative TICK closed at a very hgh +108,000 Wednesday, the eighth day out of the past nine that the Cumulative TICK indicator has closed above +50,000 as sellers remain conspicuously absent. That’s going to generate upside momentum for the intermediate-term. Recall that there’s virtually no lag between the 20-day moving average of the Cumulative TICK and the S&P500, implying the raw readings function as a lead indicator. Right now those raw numbers are quite bullish, similar to readings from mid-July.
Noteworthy that over 900 issues across the NYSE & NASDAQ closed over their upper bollinger bands Wednesday, signaling a large amount of upside momentum. That’s only the tenth occurrence of a 900+ reading in the last three years, eight of which saw upside follow-through over the next 1-2 days. The bullish price action propelled the S&P out of the rising trendline channel seen on this chart, suggesting a potential upside breakout despite technically overbought conditions.
Wednesday marked the eighth session out of the past ten that advancing issues outnumbered decliners by over a 2:1 margin, a streak never matched over the last twenty years. The persistently positive breadth has sent our version of Standard & Poors Oscillator to an extremely high 10.81 Wednesday, a bullish development. There have only been ten other instances in the last forty years in which the Standard & Poors Oscillator closed over 10.0. Each of those instances is listed in the table below, along with the S&P500’s performance over the subsequent one, two and three-month time frames. While the sample size is small, the market’s consistently strong performance is impressive considering the S&P’s overbought status at the time of the signal. In all nine closed signals, the S&P500 was higher one, two and three months later…
S&P Oscillator Closes Over 10.0
09/16/09… S&P ??? in one month, ??? in two months, ??? in three months
07/23/09… S&P +3.2% in one month, +9.5% in two months (open), ??? in three months
03/23/09… S&P +3.3% in one month, +10.4% in two months, +10.7% in three months
01/06/92… S&P +1.1% in one month, +2.8% in two months, +1.1% in three months
02/06/91… S&P +4.7% in one month, +2.3% in two months, +3.8% in three months
01/15/87… S&P +4.6% in one month, +9.1% in two months, +12.9% in three months
10/13/82… S&P +2.9% in one month, +1.3% in two months, +6.0% in three months
08/25/82… S&P +4.6% in one month, +17.2% in two months, +16.6% in three months
01/08/76… S&P +6.3% in one month, +7.2% in two months, +9.2% in three months
02/03/75… S&P +6.5% in one month, +6.9% in two months, +15.5% in three months
01/10/75… S&P +8.1% in one month, +17.8% in two months, +13.7% in three months
Readings this high indicate a ‘runaway’ scenario is unfolding, one in which dips remain very shallow and highs are easily taken out. While I wouldn’t normally draw too much from only nine occurrences, each of these signals share a key characteristic – from the trigger date, the market essentially never looked back. The largest drawdown (on a closing basis) was less than 2.5% in every case but one (and less than 5% in that case) looking out as far as three months. Should the market perform in a similar manner this time around, we shouldn’t see a close back under SPX 1015 (and probably not below 1040) for some time.
Overbought and Breaking Out
By Rennie on Thursday, September 17th, 2009 at 2:12 amWhen you’re wrong, you’re wrong. A number of short-term sell signals triggered over the past two weeks have been run over by this rally. I still have short-term sells on the board, but it’s difficult to embrace the downside when there’s such obvious momentum on the upside and a virtual ‘sellers strike’. New 52-week highs surged to over 350 on the NYSE, the highest level since October 20007 and near the key 400 level (more on this later). Cumulative TICK closed at a very hgh +108,000 Wednesday, the eighth day out of the past nine that the Cumulative TICK indicator has closed above +50,000 as sellers remain conspicuously absent. That’s going to generate upside momentum for the intermediate-term. Recall that there’s virtually no lag between the 20-day moving average of the Cumulative TICK and the S&P500, implying the raw readings function as a lead indicator. Right now those raw numbers are quite bullish, similar to readings from mid-July.
Noteworthy that over 900 issues across the NYSE & NASDAQ closed over their upper bollinger bands Wednesday, signaling a large amount of upside momentum. That’s only the tenth occurrence of a 900+ reading in the last three years, eight of which saw upside follow-through over the next 1-2 days. The bullish price action propelled the S&P out of the rising trendline channel seen on this chart, suggesting a potential upside breakout despite technically overbought conditions.
Wednesday marked the eighth session out of the past ten that advancing issues outnumbered decliners by over a 2:1 margin, a streak never matched over the last twenty years. The persistently positive breadth has sent our version of Standard & Poors Oscillator to an extremely high 10.81 Wednesday, a bullish development. There have only been ten other instances in the last forty years in which the Standard & Poors Oscillator closed over 10.0. Each of those instances is listed in the table below, along with the S&P500’s performance over the subsequent one, two and three-month time frames. While the sample size is small, the market’s consistently strong performance is impressive considering the S&P’s overbought status at the time of the signal. In all nine closed signals, the S&P500 was higher one, two and three months later…
S&P Oscillator Closes Over 10.0
09/16/09… S&P ??? in one month, ??? in two months, ??? in three months
07/23/09… S&P +3.2% in one month, +9.5% in two months (open), ??? in three months
03/23/09… S&P +3.3% in one month, +10.4% in two months, +10.7% in three months
01/06/92… S&P +1.1% in one month, +2.8% in two months, +1.1% in three months
02/06/91… S&P +4.7% in one month, +2.3% in two months, +3.8% in three months
01/15/87… S&P +4.6% in one month, +9.1% in two months, +12.9% in three months
10/13/82… S&P +2.9% in one month, +1.3% in two months, +6.0% in three months
08/25/82… S&P +4.6% in one month, +17.2% in two months, +16.6% in three months
01/08/76… S&P +6.3% in one month, +7.2% in two months, +9.2% in three months
02/03/75… S&P +6.5% in one month, +6.9% in two months, +15.5% in three months
01/10/75… S&P +8.1% in one month, +17.8% in two months, +13.7% in three months
Readings this high indicate a ‘runaway’ scenario is unfolding, one in which dips remain very shallow and highs are easily taken out. While I wouldn’t normally draw too much from only nine occurrences, each of these signals share a key characteristic – from the trigger date, the market essentially never looked back. The largest drawdown (on a closing basis) was less than 2.5% in every case but one (and less than 5% in that case) looking out as far as three months. Should the market perform in a similar manner this time around, we shouldn’t see a close back under SPX 1015 (and probably not below 1040) for some time.