My Favorite Indicators for Pinpointing Major Market Bottoms
Markets have been blown apart over the last couple of weeks with fear and panic. So what is next? I’m watching several indicators that may lead me to a bottom in the S&P’s.
Below is the chart of the SPX (top window) with it’s “On Balance Volume (OBV) indicator set”: The second window from top is the Climactic Volume Indicator (CVI) which measures extreme OBV movement within in the context of a short term OBV envelope for each stock in the index. The Short term Volume Oscillator (STVO) (Third window down) is a 5-day moving average of CVI. The Volume Trend Oscillator (VTO) (bottom window), summarizes rising and falling OBV trends. VTO has been good finding intermediate term lows when this indicator reaches near the minus 50 range. On the chart above dating back to 1999, we have drawn red arrows up to the SPX when VTO has reached -50 or below. You can see this indicator did a fine job picking out intermediate term lows.
Let’s look at the shorter term timeframe for SPX and VTO. The chart below was updated to September 15 and took in Monday’s crash like day. With Monday’s big drop in the SPX of 4.7% the VTO fall did not correspond to the SPX fall. Not all indicators work all the time, and the market dynamics on the current market action are producing a situation in the VTO that is not showing a bullish resolution, at least not yet. Therefore this indicator is neutral to bearish as of the close of 9/15/08.
“Selling Climax Day” is a day when volume jumps higher then the days around it. This “Selling Climax Day” stops the decline at least momentary. Below we have identified days (blue arrows) when volume jumped higher then the days around it. The day we are writing this report is 9/16/08 and today’s big volume jump appears to be creating a “Selling climax Day” and will turn the short term trend from down to neutral or up. It has been our experience that all “Selling Climax day” lows are tested, at some point. When the “Selling Climax day” low is tested, the volume will tell if the test will be a lasting test and create a bullish signal or that more work will be needed to the downside. The first chart we showed above in this report was the VTO chart and its story is saying that a bottom of intermediate term scale is not being formed here. The “Selling Climax day” implies the decline may have stopped for the moment, but the true test of a bottom will come when the “Selling Climax day” low is tested. From our studies in the market, we view volume as energy in the market. Eliminate volume (energy) then market can not move.
The test of the “Selling Climax Day” low on lighter volume shows that energy has decreased on the test and therefore a bullish divergence. The lighter the volume on the test of the “Selling Climax Day” low the more bullish the divergence and stronger the buy signal. Therefore, a trader can determine the strength of a signal by the volume of a test of a “Selling Climax day” low. If a trader had a chose of two stocks testing the low of a “Selling Climax day” and first stock showed a 20% drop in volume on the test and second stock showed a 40% drop in volume on the test, the right chose would be to pick the second stock with a 40% drop in volume in that it showed less strength to the downside then first stock and therefore the most bullish. Getting back to the SPY chart below, today’s market action is a possible “Selling Climax day” low which is a bullish sign. The true outcome of the market will be when the “Selling Climax Day” low is tested. If the test comes on much lighter volume and then closes above the “Selling Climax Day” low, then a bullish signal will be created. Notice on the SPY chart below that several “Selling Climax days” are shown (blue arrows) but none had lighter volume on the re-test and therefore no longer term bullish signal has been triggered.
Next chart is the “9 month Cycle Low” chart. This chart identifies with verticals lines when the “9 Month Cycle Low” is due. The Next time this cycle is due for a low is 10-22-08. Since VTO is not producing a bullish signal here and it appears it will need more time to retrace to the downside it may line up well for a bottom on VTO near the October 22 timeframe. Also if today’s does turnout to be a “Selling Climax Day” then the re-test of today’s low may come close to October 22.
My conclusion is that the market may be near a price low now but the proof of the pudding will come on the re-test of the “Selling Climax day” low which may show up at the “9 Month Cycle low” due October 22 and VTO helps support this conclusion.
Tim Ord is president, editor and publisher of “The Ord Oracle” established in 1990. His newsletter is a Monday through Thursday email report that trades the S&P, Nasdaq and gold issues. He is frequently listed in the top 10 market timers in the country. If you purchase his book “The Secret Science of Price and Volume” through www.ord-oracle.com/”ord-oracle.com you will receive a copy signed by Tim.