First, let's look at the Market weighted average TEV.
This is a breadth indicator, because it takes the normalized weighted TEV average and the average of the extension for about 1,000 stocks. The extension is the distance between the blue and the pink line. In other words, the pink line is the average of all the average TEV of all the 1,000 stocks and the blue line is the average of all the extensions.
The only thing we can do is compare the level of the blue line today with past levels and see what the market did when such levels were reached. A few comments:
1. All the arrows (green and blue) are defined because they first reached the 30% level and then formed a bottom. In our case, we indeed reached the 30% level, but we did not form a bottom yet. A bottom could form here, but could also form at 20% or 10% levels.
2 The second obvious comment is that twice (blue arrows,) the signal reversed, but the price continued down after a very small bounce.
Below is a reference table that shows the price when the signal touched the 30% level and when the price found a bottom. Yellow shows the pre-pomo market.
During the pomo market in green, we only reached that oversold level twice and we bounced within 2 days, with a very small loss.
6/30 corresponded to the end of QE1.
My opinion is that if we go much lower than -2% (probably if we break through the 200MA of IWM,) this will be a sign that the market sees itself definitively out of pomo and somewhere with few hopes for a continuation of the uptrend.
Lets now go to the Extension of the Market weighted average TEV
The extension is simply the difference between the pink and the blue line. Results are shown below
This figure measures how fast the down move has been in terms of negative MF. We can see that below the -15% level, most occurrences reversed very fast.
How fast? This is shown in the table below. You will note that the "bounce price" is not the bottom of the whole move, but it is defined as a place where a bounce will occur. Whether or not the bounce fails is another story, but at least we know that the bounce will take the price higher than the price hit at the 15% extension level. This table shows that we are close to a technical bounce.
Let's now look at the Number of days until a BUY signal
As a reminder of how the sectors graphs work: (See Large Players’ Strength Panel.)
- A SELL signal is issued when the gray true MF signal falls below the 0 line
- A BUY signal is issued when the gray true MF signal crosses over the black average, when the black average is below 0
- A sector enters "Short wait mode" when the gray signal crosses below the black one and the black one is above 0.
- A sector in a "Buy wait mode" when the gray signal crossed below the 0 line and is still below the black one.
The idea here is to start counting the number of sectors that are in each wait mode and then to evaluate the average number of days for all these sectors to issue a signal. The "number of days" is evaluated by taking the distance between the true signal and its average and by calculating the average change of that distance for the past X days.
For example, in the case of Biotech, the distance as of June 10 was about -1.2%. Statistically, this distance has been covered within 5 trading days.
Let's look at the evolution of the ratio of the number of sectors that are in a "Buy signal wait mode." There are three phases in the evolution from a sell to a buy mode:
Phase 1: The first wave of selling hits and a growing number of sectors hit the "sell" signal. Once it hits the sell signal, a sector is by definition in a "buy signal wait mode." When the selling increases, at some point, we could have half of the sectors below the "0" level, which means that they would have hit the sell zone. This event is shown by the pink dotted line.
Phase 2: From that level, the ratio of the sectors on a buy signal wait mode could increase further depending on the strength of the selling wave. However, at some point, selling will subside and the number of new sectors hitting the sell zone will start to be smaller than the number of the sectors hitting the buy zone. At some point, there will be on average more buy than sell signals being issued and we will find ourselves at the orange dotted line, just below the 50% ratio.
Phase 3: This phase simply counts the average number of days until the sectors that are below 0 will issue a buy signal. When this number becomes negative, it means that the majority of the sectors that had been on a "buy signal wait mode" have issued their buy signal. This is usually where there is "consensus" on the upwards move.
CONCLUSIONS
I believe that the table below gives a good picture of the dynamics linked to the generation of a buy signal.
The first column shows the dates and returns for the signal generated by the extension TEV going below -15%. This indicator detects swift selling patterns. You will note that in two cases, we did not reach the -15%, while the other indicators detected an oversold condition. It is obviously the fastest to detect selling strength, and about coincides with the Phase 1 of the "counting the number of days" indicator.
Obviously, "a lot of selling" does not mean that the market will reverse, that buyers will come. What we see is that we still have more selling before a reversal is detected. It is the 20DMF that most accurately detects reversals, because it measures the evolution of each sector and issues a buy signal when on average there are more sectors that turn positive than there are sectors that turn negative. So, basically the 20DMF detects the peak between Phase 1 and Phase 2. This peak is often triggered by shorts covering.
Phase 2 would be the situation where the market's equilibrium tends to change: a new base is forming and IBD might issue an FTD. I believe that Phase 3 would most probably coincide with an IBD FTD (I'll check this with MIKE, as I do not keep track of IBD's calls.)
One last important point: The 20DMF has generated during the same period about 8 other buy signals, that generated more than 26% of additional profits. The reason for this is simply that it is possible to reach an oversold condition before we get to the 50% ratio of Buy/Sell sectors.
In today's market, you can see that we have the -15% oversold condition met, the P1 condition met and the 20DMF condition met. I found the 20DMF's buy signal early compared to the number of days it took in the past to work out an oversold condition.
This might be due to options expiration, or maybe to the fact the market has become "bipolarized" with everybody being in the same trade.
PS: Please note that the exit dates are all the same and were provided by the 20DMF's trend change signal.
Mike sent me the IBD calls that were the most closely related to my table.
As I expected, FTD calls are issued always after phase 2 and sometimes after phase 3, when the market has been up already and the trend direction is more secure.
