Breadth turns Bearish and standing on the edge of a cliff $study

 

All eyes on Europe this weekend as voter sentiment weighs in on the fiscal difficulties in the EU with votes in France, Greece and Germany.   A move to the left adds doubt into an already mistrusted European fiscal stimulus / austerity program.  Should Sarkozy pull off the miracle, we should see a bounce on Monday’s markets but anything more than a bounce from oversold markets is in doubt as a Sarkozy victory is status quo and that  is not saying much.  Should the left prevail, we would expect to see more money seeking less risk which places large caps, utilities and bonds in favor.

 

Our Breadth on Friday put both of our longer term indicators into the bear’s column making us want to go to short/protective mode on bounces. The McClellan Summation index turned on us, it had gone to neutral on Thursday.

 

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We see the same thing on the cumulative 4 week new high new load ratio which has turned.  Just one day bearish on this indicator though.

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Our shorter term breadth indicators are all screaming bounce!  The raw new/high new low is extremely stretched. We should see some upside relief in the next 2 days.

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The 40 DPI (% of stocks about the 40 day PMA) blew through its supporting trendline on Friday.  It is yet to put in a lower low which is somewhat bullish encouraging.

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The Cumulative Volume index broke its lower trend line, but sits at a triple bottom here where it has found support twice before:

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Longer term view of the same indicator:

 

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And finally below is our Zweig indicator which could easily be back on its way to oversold land (below 40).  This indicator is one more day of selling from being extremely oversold.  We need to watch this on Monday very closely as it may setup into a decent risk long.

 

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Summary:

Breadth has turned bearish as money is seeking low risk and going into summer protection mode.  Volatility will return to the markets and one more day of selling will increase the likely hood of a bounce to levels worth risking on a short term long.  The bounce however is in doubt of achieving anything more than a nice exit for longs and an opportunity to go short.   We could bounce from here and light risk could make a Monday long worth entertaining on a decent entry.

 

-Red