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Stock Market Breadth Aligns With Pullback Scenario

Stock-Markets / Stock Markets 2012 Feb 29, 2012 - 01:20 AM GMT

By: Chris_Ciovacco

Stock-Markets

Best Financial Markets Analysis ArticleYesterday, we noted some bad news would probably be needed to tip the scales in this market. This morning’s economic data fits the “bad news” bill. From Reuters:

New orders for long-lasting manufactured goods fell in January by the most in three years as demand slumped across the board, suggesting the economy started the year on weaker footing than expected. Durable goods orders dropped 4.0 percent, the biggest decline since January 2009 when the country was still mired in a deep recession, according to Commerce Department data on Tuesday.


We often use the Summation Index as a way to monitor the markets “internals”. The Summation Index is a market breadth indicator that is derived from the number of advancing and declining stocks in a given market. The concept of breadth is easy to understand; healthy markets have broad participation during rallies (a stable or rising Summation Index).

The charts below are busy, but the concepts are simple. In the present day (shown below), the Summation Index climbed above 1,300 and has now started to decline (see orange box and blue arrow top right). The blue arrows to the left show the previous times the Summation Index turned down after a rally in stocks; the S&P 500 corrected soon thereafter (see purple boxes at bottom). Corrections in stocks (purple boxes) also occurred after RSI turned down from high levels (red boxes top); the far right red box shows the similar setup we have in RSI today, which leans bearish.

The concepts presented in the chart above apply to the 2003-2004 chart below as well. The Summation Index turned down from above/near 1,300 and stock market weakness/consolidation followed. RSI (red boxes below) also dropped below 70, just as it has today (red box above far right).

The chart below takes a closer look at the 2003 case. After the Summation Index rolled over from a level near 1,300, the S&P 500 dropped 5% over the next two weeks.

The setup in 2009 was similar. Stocks dropped 5.5% in three weeks (point A), rallied 8.7% over the next three weeks (B), and then dropped 9.1% over the next four weeks (C).

The takeaways for us today are (a) the odds favor some type of pullback beginning in the next week or so, (b) markets may be volatile for a time while making little progress, and (c) we have to be open to higher highs in the coming months. As noted in yesterday’s post/video, two items carry a bullish bias in the short-run: (1) the take up of ECB’s second round of three-year loans is announced Wednesday, and (2) Wall Street likes to “mark up” stocks at month end.

Ciovacco Capital Management

    Copyright (C) 2012 Ciovacco Capital Management, LLC All Rights Reserved.

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

    Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

    All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

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