Lots of Short-Term Indicators Reversing from Bearish Extremes - What Does It Mean?

• Indicators Start to Flash Buy Signals
• What Happened in the 1929-32 Bear Market?
• Longer-Term Perspective

Whenever the market rallies by 8-9%, it's obvious that some form of bottom has taken place (however fleeting), so I don't want to state the obvious. It is apparent, though, that some of the short-term indicators have finally begun reversing to the upside, which suggests that, for all intents and purposes, this week's low will hold for a while. Let's consider some of them.

Indicators Start to Flash Buy Signals

Chart 1 features a 10-and 20-day MA of the McClellan Volume Oscillator. Rallies typically develop following periods when the 10-day series reverses to the upside from the oversold dashed green horizontal line. However, when it falls even lower below the solid thick green line and then reverses, a more durable bottom tends to form. Note that the indicator re-crossed back above that line today and actually reached a lower level than it did in December 2018.

Chart 1

Chart 2 features the NYSE Bullish Percent, which almost took out its 2008 record low, but, at a reading close to 5, certainly reached a crisis extreme. Apart from that October 2008 low (B), it only got really close to the solid line at the bear market bottom in 2009 (C). It also dropped below the dashed line again at A, right at the beginning of the bear market. The fact that this occurred at the start of the bear market gives me pause to think; although a nice rally, taking the Index back to its 200-day MA, followed, it developed close to the peak, which cannot be ruled out in the current situation.

Chart 2

Chart 3 compares the SPDR Dow Jones ETF, the DIA, to my Dow Diffusion indicator. It's a series which monitors the percentage of Dow stocks in a positive trend and triggers buy signals when it reverses direction from an oversold reading. The arrows demonstrate signals that were triggered from an even lower level at the green dashed line. The two dashed arrows reflect weak rallies that developed under the context of the 2007-09 bear market. Even then, the reversals did flag a respite of several weeks from the strong down draft. The indicator's current level is pretty close to a record, so it's certainly reflecting a deeply oversold market. However, while it's true to say that it has flattened, it has not yet started to turn. Given the position of the indicators in the previous charts, I would expect an upside reversal looks to happen at virtually any time.

Chart 3

One sign of an improving technical position comes when the Index being monitored falls to a new low for the move, but the number of stocks does not. That's the sort of thing that developed at the 2009 bottom and appears to be materializing today. In Chart 3, it is evident the net number of new lows was far less on Monday's closing than it was on March 12. The NYA closed around 1000 on March 12, yet on Monday it was around 8750.

Chart 4

Finally, my Bottom Fisher (!PR BFISH) has actually fallen below its previous record low, set during the 2007-09 bear market. Historical bottoms that have developed at an extreme reading have been flagged by the vertical lines. Seven of them were followed by excellent rallies. Two of them, indicated by the dashed lines, were not so prescient, as they developed during a vicious bear market. All we have to do now is wait for an upside reversal, which could come at any time.

Chart 5

What Happened in the 1929-32 Bear Market?

Most of the indicators I have described here cannot be taken back to the Great Depression, where it is possible to establish a longer term track record. This final example uses a simple 10-day MA of a 12-day ROC and observes when a reversal from an extreme level develops.

Charts 6-8 plot its trajectory. Note that we saw two weak signals during the 1929-32 bear market, as covered in Chart 6.

Chart 6

Other periods, apart from the 1932 low itself, developed at the outbreak of war in 1940, the 1987 crash and the October 2008 low during the 2007-09 bear market.

Chart 7

Chart 8 shows that whilst the MA is at an extreme level, it has not yet turned to the upside. The actual ROC in the bottom window is right at its down trendline, which suggests an imminent turn for the better.

Chart 8

Longer-Term Perspective

Let's not kid ourselves - the 2020 decline has done a lot of long-term technical damage, as many bull market trend lines on the monthly charts emanating from 2009 have been decisively and severely ruptured. That's why any rally could turn out to be an advance under the context of a wider primary bear market. Alternatively, these monthly charts require end of the month data, so we won't know where they really stand until next Tuesday's close. Consequently, a really strong rally could yet invalidate a lot of these negative signals. All we can say with any degree of confidence is that prices have probably hit bottom for a while. What "for a while" means is unknowable at this point. Based on 1929 and 2007 it could be several weeks, while under a 1987 scenario it could be forever, as the 1987 low has never been taken out.

Don't forget these charts can be updated at any time simply by clicking on them.

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.