Seven Lucky Indicators Starting To Look Bullish

• Three Short-Term Oscillators Positioned for a Rally
• Two Psychological Indicators Looking Bullish
• Just When You Thought Bonds Would Go Up Forever

Usually, it takes a long time for some of the indicators to reach what we might call "deep fear" levels, points from which important rallies can be launched. Some of those indicators have already managed such a feat in a very brief eight days, so let's review them and take a look at what's likely to happen.

Firstly, when I refer to buy signals, I am looking for two conditions: an extreme oversold reading, followed by a genuine reversal to the upside. In this analysis, it's of paramount importance to be able to distinguish between a buy signal generated in a bear market from one triggered in a bull market. Usually, in primary uptrends, the market is extremely sensitive to an oversold reversal, as it bounces back sharply from such a condition. If you have ever accidentally put your hand on a hot electric burner, you have an idea of what I mean, as that hand will move quickly out of the danger zone. On the other hand, a similar reversal taking place under the context of a primary bear market would either trigger a nice bear market rally or be followed by a 2-4-week trading range, after which prices renew their downward trajectory.

Three Short-Term Oscillators Positioned for a Rally

A great-performing indicator is a simple 14-day RSI, as featured in Chart 1. The pink-shaded area represents part of the 2007-09 bear market. Note that none of the oversold reversals resulted in much of a rally, except for the last decline, which was followed by the initial advance in the new bull market.

On the other hand, all of the signals triggered during a bull market environment were followed by meaningful rallies. In some instances, prices consolidated their losses prior to taking off, but you can certainly appreciate the different response to the two environments.

Chart 1

Chart 2 offers a similar approach, this time using a volume PVO. The PVO is a volume oscillator that compares a 12-day EMA of NYSE volume with a 26-day EMA of the same. When it reaches an extreme and then reverses, that indicates that activity has probably peaked for a time. If this happens following a rally, the implication is for a trading range or lower prices, since it reflects the fact that traders are exhausted on the buy side. On the other hand, a rally in the indicator following a price decline represents a selling climax, as it indicates exhaustion on behalf of sellers. Since fear is a greater motivator than greed, buying climaxes tend to be less reliable than selling climaxes. In the last few days, the oscillator has rallied to an extreme level and ticked slightly lower. That does not unequivocally tell us that the selling is over, but it does suggests that it's probably pretty close.

Chart 2

Finally, Chart 3 shows that the number of NYSE stocks above their 50-day MA has moved down to an extreme reading. The solid arrows indicate reversals from an even lower reading and the dashed ones from around its current level.

Chart 3

Two Psychological Indicators Looking Bullish

The VIX is a popular way of measuring fear, but a more appealing technique is to calculate a 10-day ROC of this indicator, wait for it to reach an extreme and subsequently reverse. The green vertical lines in Chart 4 flag such instances that have developed in the last three years.

Chart 4

Another way of measuring psychology is to examine swings in the 10-day ROC for the spread between the iBoxx High Yield and the iShares 7-10-year Treasury (_HYG/_IEF). Chart 5 shows that this series too, has moved to an extreme, which suggests that it's time to move in an upward direction.

Chart 5

Just When You Thought Bonds Would Go Up Forever

During the recent sell-off, stocks and bonds moved in different directions. Now, it looks as if the bond part of the narrative has reversed. This is shown in Chart 6, where you can see that the iShares 20-Year Trust experienced a key reversal day on Wednesday. A key reversal develops after a sharp rally as buyers become exhausted. Consequently, buyers are very in much control coming into that session, as they cause the price to gap up at the opening. By the end of the session, though, sellers hold sway, as the price closes close to where it closed the previous day. High volume accentuates such action, as many traders go home trapped at higher prices. These key reversals are fairly rare phenomena, but, when they develop, they often occur at major turning points. If bonds and stocks continue to move in opposite directions, that should be bullish for stocks.

Chart 6

Conclusion

All of the stock market indicators described here have reached some kind of oversold reading that has typically been followed by a meaningful advance. It's also true that some of them have yet to meet our second condition, involving an upside reversal. Bearing in mind the sensitivity of oscillators to oversold conditions during a primary bull market, current readings are not inconsistent with a nice rally. Underscoring the possibility that these indicators will quickly turn higher is the fact that Wednesday's NASDAQ action represents a bullish outside day, whereby its trading range more than encompassed Tuesday's. These patterns, when they work, are only expected to influence prices for between 5-10 days, but that should be more than enough to result in an upside reversal in all the oscillators cited above.

Chart 7

If we are in the early stages of a bear market, I would just expect a short-term rally or trading range followed by lower prices. However, the vast majority of longer-term technical evidence points to a primary bull. Consequently, I am concluding that recent action has provided us with an intermediate buying opportunity which, notwithstanding some initial range-bound action, will eventually lead to significant new highs.

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 Groupof Walnut Creek or its affiliates.