Bottoms Up Part II

• Positive breadth characteristics
• VIX is less fearful
• Short-term oscillators starting to get extremely oversold
• How about trend?

Last week I suggested that the market may be in the process of forming a double bottom.  This week we take that possibility one step forward. Whenever the non-financial cable networks run a “Dow Watch” or something similar, it’s usually a great indicator that things are overdone, at least for the time being. In the last few weeks we have experienced several “watches”, mostly on the downside. I am not sure what action we humble viewers are supposed to take from the “watch”, but is certainly makes good copy for the networks.

Generally speaking, when one of the lead stories on the general news concerns the stock market, it means that the bad news has been widely disseminated and all, except the most late of the late comers have had the opportunity to liquidate. This morning, witnessed a great example of this phenomenon. It was based on an overnight sell-off in the futures markets. I was always told that when things appear to be at their blackest, it’s time to pick up the phone with your shaking hand and instruct your broker to buy. In this day and age, we have to steady that shaking hand to execute a mouse click instead!

Of course, this is only anecdotal evidence, and needs to be backed up with some actual proof from the technical indicators. There are two broad places to look, characteristics and trend. Characteristics involve concepts such as breadth and momentum divergences, overstretched oscillator readings, and so forth. Trend means that bullish or bearish characteristics need to be confirmed by some indication that the market is responding to such conditions. Examples would be trendline violations, price pattern completions or moving average crossovers etc.

Positive breadth characteristics

Chart 1 shows that the NYSE A/D Line and the A/D line confined to monitoring common stocks only, both touched their low point in early February. This compares to the low for the NYSE Composite, which was recorded later on in March. Technicians view this as a positive development because it indicates that the broad market is stronger than the averages. Had it been the other way around, with the A/D Lines registering new lows in March unconfirmed by the NYA, that would have been bearish.

Chart 1

Another useful indicator that tells us whether participation is broad or narrow, comes from net new high data, as featured in Chart 2. This series is calculated by subtracting NYSE stocks registering new 52-week highs from those making a 52-week low. When it is possible to construct meaningful trend lines on this series and the line is penetrated, useful buy and sell signals are generated. We see four successful violations that have taken place in the last 9-months. The dashed green and red arrows also point up that many of these trend changes are also associated with positive and negative divergences. Right now, the high/low indicator itself is just below its 2018 down trend line. Should it go through, that would represent another bullish signal. Also worth noting, is the fact that the indicator made its low in early February.

On an intraday basis, the $NYA did as well. This week though, it came extremely close to that February low. This compares to the net new high series, which was close to registering a positive condition whereby there were more highs than lows.

Chart 2

$VIX is less fearful

Another bullish characteristic is being sported by the 10-day ROC of the $VIX. It is featured in Chart 3, where you can see that on a closing basis the $NYA recorded its low in late March. Compare that to the relatively low reading being recorded at the time for the VIX. This indicated that the level of fear, was far less in March, even though prices were lower than they were in February. The situation is not dissimilar to the relatively mild positive divergence that took place in August of last year.

Chart 3

Short-term oscillators starting to get extremely oversold

Charts 4 and 5 feature two oscillators that have now moved to an extreme condition. First, we see that the Dow diffusion series has now dropped below the deeply oversold green horizontal line. Each time it has reversed from at or below this level, some kind of advance has followed. The two dashed arrows reflect weak rallies that took place during the course of a primary bear market. The indicator is still declining, so we cannot yet book a bullish signal. However, it is at the kind of reading where the slightest dissipation of downside momentum is likely to result in an upside reversal.

Chart 4

Chart 5 shows a couple of moving averages calculated from the McClellan volume oscillator for the NASDAQ. Buy signals develop when the indicator reverses from a position at or below the oversold line. The two dashed lines indicate failed signals. Right now, the indicator is falling, but is at a very oversold reading. That’s important because the NASDAQ Composite is right at its 2016-18 up trend line and 200-day MA. Normally when an oversold market reaches major support, it bounces to the upside.

Chart 5

Chart 6 features a similar arrangement for the NYSE Composite ($NYA). In this instance, the support takes the form of a horizontal trend line and 200-day MA. Note also that the oscillator is also oversold. However, it does appear to be turning to the upside. That's just as well because a downside breech of that red horizontal line would complete a nasty looking top.

Chart 6

How about trend?

Unfortunately, there are no clear-cut places where we could say that the positive characteristics discussed above could be confirmed beyond a reasonable doubt. The DIA appears to offer the best of a bad bunch of potential benchmarks in the form of a down trend line that has been touched three times. It is currently at 24,600. The closing high for the potential March/April mini bottom is at 24,200.

Chart 7

Chart 8 shows that the downtrend line for the $NYA is at 12,515 and that for the S&P slightly above its 50-day line at 2717. If all these levels are taken out there would be an excellent chance that the market had reached another hurdle in its attempt to form a double bottom. That final confirmation though, would require a closing price above the mid-March highs. Please remember, that all these charts can be updated by clicking on them.

Chart 8

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.