Thursday, November 24, 2011

Thanksgiving Low?

It looks like a bit of panic is creeping into the markets. On the news front, the Grand Congressional Committee on the budget deficit spun around in circles chasing its tale giving us a whiff of what we already knew. So that cat is out of the bag and what's left to worry about is the total collapse of Europe and a worldwide recession. Guess what? I don't think it's going to happen, the governments, bankers and kings will change the rules however they see fit, they will print any amount of new money, in short do whatever is necessary to keep the ship afloat. But, hey what do I know?

The SPX has closed below the lower Bollinger Band which is negative and will require a test of Friday's close within the BB before we can call a reversal in here.

On the plus side the New Lows are nowhere near the readings seen at the last lows which is bullish and an indication that the upcoming reversal will be something more substantial than we have seen in the last few months. Of course this could be nullified by a meltdown here but I think that is unlikely.

The McClellan Oscillator finished the week at -326, this is very oversold but suggests a bit of caution is warranted here. Typically we can expect a bounce from this oversold level but since the SPX closed below the BB, we could expect some sort of zig-zag in the MCO here. The 10% Indicator finished at -500, which is my lower threshold and confirms that we could expect both a bounce and a retest of Friday's low.

The Climatic Volume Indicator has made a triple zig-zag in the -75 zone which usually results in a bounce. The 10 day SMA on the CVI indicates we could see another 2-3 days of weakness which fits into the retest scenario.

Short of a news driven meltdown the markets look like they are forming a tradable low here. Time will tell.

The McClellan Oscillator
Click to enlarge

The Climatic Volume Indicator
Click to enlarge

Nov 30: Some additional observations.

In hindsight. I've mentioned before that "oversold" conditions in the MCO are not all the same. That is, an extreme reading like the MCO at -326 on Nov 23, has to be viewed in context.

On Nov 23, with the MCO at -326, the Summation Index, which is the running total of the daily MCO, was at +1897, well above the zero line.

At the August low the MCO was below -400, with the SUM Index in the -1000 area, well below the zero line. AND, well below +1000 which I think is the median value I use for neutral (instead of zero)

Typically, in normal swings the MCO is "oversold" in the -200 area. The MCO is the difference between the 5% and 10% MAVGs of the Advance-Declines so the location of the 5% and 10% Index give us an idea of the extremes being reached.

For example, In August, the 5% Index was about -522, meaning that over (approx) the last 40 days, there were on average 500 MORE stocks down than up. The 10% Index bottomed at -960, and for the last 20 days there were, on average, 960 MORE stocks down than up.

The Summation Index points out the extreme in negativity because it takes the duration into account. In the recent decline the 5% Index was -173, the 10% Index -499, with the MCO at -326.

While these are all oversold readings, the SUM Index at +1897 was indicating that the correction was occurring in a bullish phase, since it takes a bit of time with a positive MCO to get the SUM Index above +3000 like it was in mid-Nivember. Getting the MCO down into the -300 area with a high SUM Index reading is often caused by news events, which is what we are seeing now.

Finally, with a MCO below +300, and the SUM Index still positive and with the 5% Index at -173 (modestly oversold) it will take several days to get the MCO overbought, but not long to get it positive again which could happen by Friday. This will turn the SUM Index back up. Since it will be turning back up from the +1500 area most stocks will respond positively AND once the SUM gets into the 2000+ range prices tend to accelerate higher.

FWIW, I thought we might see a retest of the low but maybe not. It's possible the Thanksgiving low was a news driven overshoot and that a pullback to 1200 on the SPX would be sufficient. At the moment the SPX is between the 2 and 3 stdev Bollinger Bands on the 60 minute chart, with a lot of room overhead (1300+) on the daily. We'll see...

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