Trying to peer into the fog of future price action, I looked at the advance-decline numbers for Nasdaq. Here’s a chart of the Nasdaq along with the daily A-D numbers smoothed over a 7 day moving average:
As you can see, sharp spikes down are usually good spots for a trend reversal (a bottom, either short lived or intermediate). In the past 3 years we’ve had the following spikes (reading below -700):
- mid-March 2004 - small bounce
- May 2004 - small bounce
- mid-July 2004 - small bounce
- August 2004 - intermediate bottom
- mid-Jan 2005 - small bounce
- April 2005 - intermediate bottom
- October 2005 - intermediate bottom
- May 2006 - small bounce
- June 2006 - small bounce
- July 2006 - intermediate bottom
- March 2007 - ???
So a spike in that territory usually defines some sort of oversold. But what determines if it is a bounce or a more solid bottom?
A good tell is the % of stocks above daily moving averages. In each case of an intermediate bottom, both the long term (200 day MA) and the short term (50 day MA) were quite low. This is just a back of the napkin calculation, so what I mean by low is anywhere between 30%-20% or lower.
The only time that this didn’t happen was in last summer (June 2006). Then we had both short term and long term % stocks above MA very low but we had to wait another few weeks for the definite bottom to be carved.
Right now, we just don’t have that. The % of stocks above moving averages is sitting quite high at around 50% and 35% (for long term and short term respectively)
My conclusion after all this is that we are probably seeing a short lived bounce here. We need more capitulation to launch another leg up. So be careful out there.
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