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More Bullish Data Suggesting A Sustainable Bounce On Its Way…….

Some of you may have figured out by now I really enjoy the work Jason Goepfert does over at Sentimentrader.com  He does an excellent job of putting together intriguing statistical pieces as well as providing the most comprehensive site for sentiment based data I have come across yet.

 

This is what Jason has to say today.

 

 

Average Directional Index

 

I keep the number of technical indicators I watch to an absolute minimum.  That doesn't mean there isn't value in some of them, it's just that watching too many tends to create more problems than it solves.

 

A subscriber asked about one in particular, though, and it's throwing off an interesting reading.  The ADX indicator recently moved to an exceptionally high level, one that has been historically meaningful.

 

I don't want to delve into the mechanics of the ADX when a simple web search will turn up plenty of background (click here for an adequate one from Stockcharts.com).  As a one-second introduction, the ADX measures the strength of the current trend, using a default look-back period of 14 trading days.

 

According to Stockcharts.com, when the ADX rises above 40, it indicates a strong trend.  What they don't mention, however, is that by the time it reaches that level, the trend is most often about to end, at least temporarily.

 

No need to take my word for it, though, let's just go back to 1928 and look for any time the S&P 500 closed at at least a three-month low (so we know we're looking at downtrends here) and the ADX crossed above 40.

 

Date

1 Week

Later

2 Weeks

Later

1 Month

Later

3 Months

Later

06/02/31 11.2% 12.5% 25.8% 18.3%
09/30/31 2.1% 4.0% 9.6% -18.3%
04/13/32 0.8% 0.8% 0.3% -25.8%
12/29/41 8.6% 5.0% 5.6% -3.0%
06/13/49 3.8% 4.2% 9.1% 14.5%
08/26/57 3.5% -0.1% -2.1% -6.2%
05/10/62 0.6% -4.6% -9.1% -9.4%
06/24/65 1.1% 2.6% 0.6% 7.5%
05/16/66 2.1% 2.0% 2.8% -2.0%
08/26/66 1.3% 2.0% 2.2% 5.6%
06/20/69 0.7% 2.4% -3.7% 1.5%
07/28/69 3.1% 3.5% 4.5% 8.8%
05/04/70 -1.0% -3.0% -1.9% -1.7%
12/04/73 2.6% 1.2% 5.7% 4.7%
11/13/78 2.3% 2.2% 3.2% 6.2%
03/27/80 4.0% 5.7% 7.6% 18.3%
09/18/81 -3.0% 2.7% 2.3% 5.9%
02/23/84 2.5% 0.6% 1.7% -0.7%
12/04/87 5.1% 11.3% 15.6% 19.4%
09/24/90 3.4% 2.9% 2.6% 3.3%
10/10/90 -0.5% 4.1% 4.7% 4.7%
08/31/98 6.9% 8.4% 6.2% 21.6%
03/21/01 2.8% -1.7% 10.8% 9.0%
09/21/01 7.8% 10.9% 12.9% 18.0%
07/18/02 -4.9% 0.4% 5.4% -2.5%
07/11/08 1.7% 1.5% 5.3% -28.2%
10/09/08 4.0% -0.2% 2.3% -2.2%
03/05/09 10.0% 14.9% 23.4% 38.1%
Average 3.0% 3.4% 5.5% 3.8%
% Positive 86% 82% 86% 61%

 

The short- to intermediate-term following these signals were extremely positive, up 82% to 86% of the time, and with exceptional average returns.  The only real failure was in 1962 when we saw a short-term bounce and then a roll over into a major decline.

 

Overall, during the following month the median maximum loss was -2.7%, while the median maximum gain was +6.5%, more than twice as large.

 

It was awfully rare to get this signal during a bull market, objectively defined as a rising 200-day moving average on the S&P 500.

 

Here they are, culled from the table above:

 

Date

1 Week

Later

2 Weeks

Later

1 Month

Later

3 Months

Later

05/10/62 0.6% -4.6% -9.1% -9.4%
06/24/65 1.1% 2.6% 0.6% 7.5%
05/16/66 2.1% 2.0% 2.8% -2.0%
06/20/69 0.7% 2.4% -3.7% 1.5%
11/13/78 2.3% 2.2% 3.2% 6.2%
03/27/80 4.0% 5.7% 7.6% 18.3%
08/31/98 6.9% 8.4% 6.2% 21.6%
Average 2.5% 2.7% 1.1% 6.2%
% Positive 100% 86% 71% 71%

 

Every time, the S&P rose over the next week.  Again, that 1962 occurrence pops up, so there was that false signal.  In 1969, stocks bounced for a couple of weeks and then sunk to a new low, so that one too was only successful in the short-term.

 

Overall, though, over the next month the median maximum loss was -1.8%, while the median maximum gain was +4.1%.

 

Pretty positive stuff.

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Categories: Short-Term Trader
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