Suspect Rally Setup

We are now at rally count of +5 days from the bottom. Volume on the NYSE and NASDAQ are so far running slightly behind yesterday at 11:30 EST so we are not on a trajectory yet for a follow-through day. A late afternoon surge could produce a FTD however. I am looking for a 1.25% move up on a close-to-close basis on volume higher than yesterday on any of the following indices: NASDAQ, S&P500, NYSE Composite.

I have done studies on market conditions on the day of a FTD that lead to producing sustainable rallies. Right now only one of three conditions are inline, market internals have been bullish. The Weekly Coppock curve is in the wrong place for a sustainable rally and the IBD6000 percent of stocks with an E Distribution rating is 4.9%, too low historically to produce a sustained rally. Low percentage of stocks showing heavy distribution (E rating) indicates complacency to me and possibly not enough money on the sidelines to propel the market. In bear markets there have been zero sustained rallies when %E was below 7.4% on the day of the FTD. This analysis goes back to the beginning of the IBD6000 index in 1984. In bull markets 13% of the rally attempts from low %E conditions worked, the rest failed. In bear markets only 5% of rally attempts worked when the Coppock curve was not in position for a buy signal. We are dancing with the 200-day moving average again, a logical failure-prone location. In my opinion this is a set up for a failed rally. This does not mean a short-term rally cannot happen, say one of a few weeks duration. CANSLIM methods produce the most gains on sustained rallies.

Yesterday the Market School Exposure Model showed a B6 buy signal, lows of the NASDAQ above the 50-day moving average. So in the past five days we have seen a B3 (Lows above the 21-day ema) and the B6 just mentioned. This places the exposure count at +2 but this cannot be acted on until the buy switch is turned on by a FTD. If and when this occurs the exposure count will be limited to +2 (55% in) until the restraint switch gets turned off by a close of the market 1.25% above the close of the FTD.

I considered buying a pocket pivot in ISRG this morning until I checked my homework on the fate of the possible rally. I am instead staying in cash and not contemplating a move before the market gives us a real signal and even then I will remain cautious. I am constantly reminded that the market does not care what my opinion is, so I will go with the flow if the market wants to stage a major rally here.

[QUOTE=mscott;19001] I am constantly reminded that the market does not care what my opinion is, so I will go with the flow if the market wants to stage a major rally here.[/QUOTE]
Thank you for the update. I am constantly reminded by the market that it's not important what I think as well. I know you look at P&F based on some previous work you did here. May I suggest you look at the "standard" P&F chart for the NYSE (my favorite index for this type of analysis) and you will find that sellers appear to be holding fort at the bearish resistance line for a few days now. I am more familiar with the TSX (Canada) index which is showing the same. The NYSE bullish % is neutral (48%) and so if the bulls overcome that barrier, watch out above.
Thank you for you analysis

Thank you Mike for this analysis. I have a question with regard to the %E. Do you get this figure from the IBD site or MarketSmith?

Thanks in advance,

Martin

[QUOTE=mnoel;19008]Thank you Mike for this analysis. I have a question with regard to the %E. Do you get this figure from the IBD site or MarketSmith?

Thanks in advance,

Martin[/QUOTE]

Martin, I get the data from IBD. It appears on the general markets page and is in every issue of IBD going back to October 1984 with a minor hole when IBD failed to print the index for a while.
I have attached an image here of the exact location of the data. The IBD 6000 index is all stocks in the IBD database above $5. It is a very broad US index. IBD tallies the accumulation/distribution rating for every stock in the index and prints the total numbers daily as an inset in the upper left corner of the NASDAQ chart. I simply divide the number of E rated stocks by the total number of stocks by summing A+B+C+D+E rated stocks and then multiply by 100 to convert to percent. I found through backtesting that 7.4% and above is where sustained rallies are born. Above 18% can be too much fear however. And of course nothing is perfect, exceptions occur but in general a little blood in the streets is good for the start of a rally.

I have looked at multiple ways of analyzing this data including %A-%E, (%A+%B)-(%D+%E), %A, %E as well as Billy's method = A*10 +B*7 + C*5 + D*3 + E*1. My coefficients may be off here. Ian Woodward also has tried a method with reverse waited coefficients to Billy's formula. Billy also developed a method to weight the S&P500 index with his Accumulation/Distribution score from his weighted A/D formula.

I back tested the %E as I found it simple and effective and a direct measure of the level of fear in the market. Ian's method accomplishes much the same thing.

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Thank you very much Mike.

Regards,

Martin