Is this a dead cat bounce or a leg bounce? | chart of art
key
gist
- The major short-term breadth indicator became oversold in mid-April.
- Stocks are bouncing back after oversold numbers.
- However, the breadth of participation has not yet expanded significantly.
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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Arthur HillCMT
Chief Technology Strategist at TrendInvestorPro.com
Author, Define Trends and Trade Trends
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CMT Arthur Hill is the Chief Technology Strategist at TrendInvestorPro.com. Focusing primarily on U.S. stocks and ETFs, his systematic approach to identifying trends, finding signals within trends and establishing key price levels has made him a respected market technician. Arthur has written articles for numerous financial publications, including: Barons and Stocks and Commodities Magazine. In addition to his Chartered Market Technician (CMT) qualification, he holds an MBA from Cass Business School, City University of London. Learn more
