As a reminder there will not be a morning digest on Monday or Tuesday as I am out of town. I do want to do a quick email however on breadth and where we stand.
On Monday we are starting Day 3 of watching for a potential Zweig Breadth Thrust, that is a 10 day journey from oversold, ZBT reading of less than 40, to overbought, a reading above 61.5. The ZBT is simply the 10 day average of the NYSE advance/decline ratio. This breadth indicator event has been highly predictive in the past (>90%) of a 12 month bull cycle and happens either at the end of bear cycles or as a continuation signal in up moves like we had from the last quarter of 2012.
The last big move was in October of 2011. Note that there was a false crossing in September and it wasn’t until October we really started the strong thrust up to the oversold area. Even then we had a move down with December 20th being perhaps the best buying opportunity since March 9th, 2009.
We are there now again with our countdown. Doubt and volatility have re-entered the market and it might be a while before trenders start cashing in again. Friday’s selling was a little disappointing, but as of now the ZBT has not failed. A move back to below 40 would have us resetting the counters.
Here are some other breadth charts to watch for the overall market signaling weakness or gathering strength.
On the new high/low ratio we want to see that higher high now telling us the market breadthwise is backfilling.
Same message as above on the 40 DPI.
This chart above was the chart we used to call the XYZ top with a bearish divergence. Now we are looking for signs that a bottom is in place and that needs to be a higher high over the next couple of days without putting in a lower low.
This is our slow-boat trending chart that I wanted to see as green on Friday. It didn’t happen.
There is no rule in place that we can’t go lower, right now the directional trend remains down-sided and sell the rips is the current trading mode.
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