Was Tuesday’s rally bullish or bearish? Let’s take a look…

Then a fellow trader pointed out to me that yesterday actually qualified as a
90% Upside Day, as defined by Lowry’s. He told me that the presence of these
days in an uptrend could be a sign of a blow-off top.

As background, in 2002 Paul Desmond of Lowry’s produced a research paper
entitled “Identifying Bear Market Bottoms and New Bull Markets”. In that paper,
he discussed the concept of 90% days. A 90% Upside Day means that the NYSE
Upside Volume / (NYSE Upside Volume + NYSE Downside Volume) is greater than 90%
AND the Points Gained / (Points Gained + Points Lost) is greater than 90%. The
paper focuses on the occurrence of these days near market bottoms, but what is
also interesting is the fact that they sometimes appear near market tops.

To try and determine the potential significance of 90% Upside Days in when they
occur during an established uptrend, rather than in a downtrend, I looked at all
the 90% Upside Days he identified in his paper since 1970 (and also the 6/7/2004
day — which may or may not have qualified since I did not have the points gained
and lost data for that day). I then filtered out any days that occurred in down
trending markets or near bottoms.

I was left with 12 such instances for my sample set. I found that half the time
a 90% Upside Day, which signifies extremely strong and broad buying, would be
followed by a further rally, and half the time it would lead to a top or
significant pullback. The instances where it led to a further rally occurred on
11/30/70, 1/5/76, 10/6/82 (and 11/3/82), 12/18/84, 1-2 and 1-5 1987, and
2/11/91. The instances I identified where the 90% Upside Day in an uptrend was
followed by a top were 8/2/78, 11/12/80, 7/20/83, 6/8/88, 5/11/90 and 6/7/04.

While the data doesn’t provide strong evidence of the direction the market is
about to go, it does serve to raise a cautionary flag. I don’t believe the
strong move yesterday is as positive as some technicians would have you think.

Therefore, the song remains the same as it has for some time now. My bias
remains neutral to bullish. The trend is up. Continue to focus on the long side,
but with much extra caution. The rally is not young, and the rug could get
pulled out from under it at any time.

Best of luck with your trading,

Rob