Tuesday, April 28, 2009

Sum Perspective

The McClellan Oscillator is overbought and so are a number of other indicators. However, this looks like one of those times where 'overbought' is indicating an impulsive move higher. Sharp corrections can occur at any time but in my view, the markets will continue to climb this huge wall of worry.

The monthly S&P 500 Index with the MCO and SUM Index
Note the Bollinger Bands on the SPX Chart are 5 year (60 months)
Click to expand

Added May 6th 2009 -- from a response to a query:

I played around with BB's on a couple of the acdvance-decline oscillators, but more to see how the increasing number of issues traded was affecting the numbers. Most oscillators are used with a signal line which I think makes the additional use of the BB's unnecessary.

I posted the chart of the MCO-SUM above last week. I was curious about when the Summation Index was "too high" and how the number of issues traded affected this. Also I had felt that the true "zero" line of the Summation Index was closer to 1000 than zero, the long average on the chart confirms this.

With the SUM, turning down from one of the spike peaks means a couple of things, First the MCO has gone below zero -- but even this has more than one ramification because this can occur with both the 10% and 5% Indexes still being positive, indicating that the advance decline line is still trending up. When the SUM index is very negative, and the 10% index is below -500 like it was earlier in the year, its turning up affects only the stronger than market stocks (the ones that go up) and other issues will continue to slide to new lows.

So in the chart above, I marked the penetrations of the upper BB, these do not usually mark tops in the market, they may mark short term reversal points. What they do indicate is high momentum to the upside and usually any correction is followed by a continuation of the move.

Given the market volatility over the last year, I expect the Summation Index to continue higher -- at least to the 5000 level and potentially to all time highs above 6000. My reasoning for this is that the recent crash was extended in time and took the SPX from its upper BB to below the lower BB. The move from -4130 to +4345 (yesterday) occurred as the SPX recovered from below the 5 year BB to a point just inside the BB. Trading this far below the BB is bearish and I suspect that the SPX will fail initially at roughly SPX 1000 - and decline towards the BB again. I still want to see a decline with the 10% Index staying above the -500 level, this would provide the opportunity. None the less, getting the SPX to the 1000 level will take some time and this will I think will drive the SUM Index to the 6000 level. Should this occur, it again will setup a condition where the SUM index is indicating the move higher is not finished.

All of this is very bullish.

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