Is this a dead cat bounce or a leg bounce? | chart of art

Stocks fell sharply toward the end of April, then rebounded over the past two weeks. SPY fell 5.34% from March 28 to April 19 before bouncing back up 3.26% over the past two weeks. Does this bounce have legs? Chartists can use width to distinguish between serious and dead cat bounces. Today’s example uses the S&P 500 and the ratio of S&P 500 stocks to their 20-day SMA.

There are two steps: First, the indicator must be oversold (set up). Second, there must be a significant increase (breakout) in upward participation (signal). Oversold readings signal a significant decline and provide a setup for a bounce. Aggressive traders may trade in oversold conditions. A subsequent move above the breakout level would indicate adequate engagement to sustain the advance. Now comes the subjective part. We need to choose oversold and breakout levels. We select 10% and 70% for the SPX %Above 20-day SMA.

The green shading in the chart above indicates that the SPX %Above 20-day has become oversold, and the green arrow line indicates a subsequent move above 70%. There was a setup signal in March-April and again in October-November. Both resulted in significant rebounds. Notice the shade of red in mid-October when the indicator failed to clear 70%. This was a weak rebound and SPY moved to new lows in late October. SPX %Above 20 days later surged more than 70% in early November due to signals. The indicator recently became oversold for its mid-April setup and has bounced back above 50% this week. In fact, an oversold bounce is underway, but a move of more than 70% is needed to show a participation breakout.

We are monitoring the rebound in the S&P 500 and Nasdaq 100 at TrendInvestorPro (ChartTrader). Our 10-index composite became oversold in mid-April, but we have yet to see the breadth needed to signal a significant increase in participation. ChartTrader reports and videos provide a wide range of market timing signals and trade setups for major stocks and ETFs. This week we featured setups for the T-Bond ETF (TLT), Biotech SPDR (XBI), and four Tech ETFs (IGV, SOXX, CIBR, SKYY). Click here for immediate access.

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