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Market Lurches From Buying Climax To Selling Climax at Trader’s Narrative





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Last month, just a day before the now infamous “Flash Crash”, we looked at the sentiment data from Investors Intelligence as well as the technical data (buying climaxes). Both of them were pointing rather clearly to an upcoming correction for equity markets.

While the analysis was accurate, to be fair, ChartCraft was not expecting such an immediate correction. Their estimate was for a top to form in mid-May. In any case, we fast forward to today and find the S&P 500 has retraced about 13% from its recent highs.

The sharp drop in stock prices has caused buying climaxes to lurch from one extreme to another. A buying climax, by the way, is when a stock makes a new 52 week high and then closes the week lower. Last month they spiked to a new record weekly high, going back more than 20 years.

II buying climax selling climax Jun 2010

The last week in May took this indicator to the other extreme as selling climaxes spiked up to levels not seen since the March 2009 low. This suggests that a lot of weak hands have been thrown out of the market and implies that these recent lows should hold.

We can see the same technical breakdown in both the Short Term Composite and the Long Term Composite indexes from Investors Intelligence. These are are generated from the scores awarded to over forty indicators including breadth, sentiment, money flow, etc.

II short term composite May 2010

II long term composite May 2010

The only situation I can imagine under which stock prices would continue to deteriorate while within such an overwhelmingly oversold technical context is a crash or severe bear market. Bar that, under, so called, normal conditions, the market has reacted with higher prices in the past and I can’t find a good reason to expect otherwise today.

Yesterday we looked at the Lowry Buying Power and Selling Pressure indexes which measure the underlying demand and supply for stocks. They are telling us that amid the weak numbers and the red filling up screens, the underlying uptrend for the market is still healthy.

Tarquin Coe, market analyst at the Coe Report, points out that the S&P 500 is creating a base which corresponds to the February support level and is right under the 500 day moving average (exponential). This average has been a major guide for both bull and bear markets:

S&P 500 Fibonacci bullish percent index Jun 2010

As well, breadth, as measured by the bullish percent index for the S&P 500 is the lowest it has been since March 2009. The Fibonacci 23.6% level is also offering an area of support (calculated from the March 2009 low to the April 2010 high).

According to my calculations, this Fibonacci level corresponds to 1089 - a level which the market has been trading under for 4 days. Also, when it comes to the 500 day exponential moving average, while its slope is trending upwards, during the past cyclical bull market (2003-2007) prices never fell below it but always bounced higher after approaching it from above. So I’m not persuaded by this technical analysis as much as the ones we covered above.

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10 Responses to “Market Lurches From Buying Climax To Selling Climax”  

  1. 1 Justin

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    It’s getting awfully iffy out there.

  2. 2 william

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    i agree with you, Justin, but the fact that earnings are one month away, and should still be good, i think will give this market reason to go higher…..if to only ultimately go lower later in the year. I’m hoping for a rally to trim positions and buy more gold, which i think is getting overpriced.

  3. 3 Rod

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    “The only situation I can imagine under which stock prices would continue to deteriorate while within such an overwhelmingly oversold technical context is a crash or severe bear market. Bar that, under, so called, normal conditions, the market has reacted with higher prices in the past and I can’t find a good reason to expect otherwise today”

    In the interest of balanced reporting, since you provide so much evidence of an oversold bottom, why not provide some evidence pointing to small chances of a new bear market. Bespoke investment recently provided an analysis favoring the odds of a bear market. Instead, you are just saying that you don’t believe in a new bear market.

  4. 4 Rod

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    Noteworthy as well, we’ve been seeing these overwhelmingly oversold indicators since May 25th. In theory, we should see a powerful bounce taking the averages much higher, and this should be very fast just after the oversold condition, the faster the more oversold. No powerful bounce yet, and by that I mean at least a 61.8% retracement of the dip.

  5. 5 Babak

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    Rod, will do.

  6. 6 PAUL MONTGOMERY

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    “The last week in May took this indicator to the other extreme as selling climaxes spiked up to levels not seen since the March 2009 low. This suggests that a lot of weak hands have been thrown out of the market and implies that these recent lows should hold.”

    Eyeballing the chart selling climaxes look to be just over 100.
    I may be wrong, but I thought they peaked at 1010 in Mar 09.

    If that is correct the current figure is miles away - maybe too far to be of much relevance

    What do u think Babak?

    I am really interested, as this is a new indicator to me and I very much like the look of it

    Regards

    Paul

  7. 7 PAUL MONTGOMERY

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    PS Where did you get your nice chart from?

  8. 8 Babak

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    Paul, selling climaxes were at about 150 or so. But I understand what you’re saying. The fact that they are the highest since but not even near approaching the spike high at the March 2009 low means that this isn’t the end of a severe bear market. This is still just a minor correction (when we step back to look at the bigger picture).

    The other important aspect of this is the oversold level for both the ST and LT composites. The charts are courtesy of investors intelligence.

  9. 9 Wes

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    Babak,

    According to my data service, the S&P closed below a rising 500 EMA on 4 occasions in August of 2004, a key low in the market. Now these four closes were barely below the MA, whereas current closes are substantially lower.

    I agree that this indicator is not as persuasive as others you have presented.

  10. 10 Babak

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    Wes, barely lower on August 12th 2004 (by just 0.14 points!) - the other days it pierced the 500 EMA intra-day but closed above.

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