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mortiz

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Reply with quote  #1 
A couple weeks ago, the topic of the McClellan Summation Index (McSum) 3-Step pattern surfaced and I did not do a good job of describing the characteristics of a McSum 3-Step pattern, so here it is.

Qualifying McSum 3-step patterns have been rare over the past 80+ years, but when they do emerge, there are significant ramifications going forward, primarily, the price lows posted during the formation of a McSum 3-step pattern are never violated again, at least not in a significant manner (there is one example of a very minor price breach of the McSum 3-Step price lows going forward).

The criteria of the McSum 3-Step pattern:

1) The McSum is ratio-adjusted for historical comparisons and is based upon the NYSE AD McSum.

2) The McSum 3-step is a 5-wave pattern, three upward impulse waves and two corrective waves.

3) The McSum 3-step impulse waves must have higher highs, with its final peak being at least +1000.  Escape velocity for the ratio-adjusted McSum is +500, so a move to +1000 or higher is a sign of extreme liquidity power.

4) The McSum 3-step corrective waves must have higher lows, with the corrective waves being at least 200 McSum points, preferably 250 points.

5) The span of the McSum 3-step pattern magnitude from its low to its high must be at least 2000 McSum points, preferably 2200 points. 

The first McSum 3-step pattern meeting the above criteria commenced in the fall of 1946, ending in the early 1947.  This example fell nominally short of the +1000 high, but due to rarity of McSum 3-steps, I am going include this example.

This example is the only McSum 3-step pattern (so far) whose price lows posted during the construction of the pattern, were actually violated over two years later by one Dow point.



The next McSum 3-step pattern emerged in mid-1953, ending in early 1954.  The price low during this 3-step example occurred during its first corrective wave... with that price low never again challenged.



The next McSum 3-step example began in June 1962 and completed in early 1963.  Its final impulse wave just barely exceeded its second impulse wave high, but it was a higher high with a very powerful magnitude span of 3300 McSum points.  Once again, the price lows printed early in this example's construction were never challenged again.



In the early 1980s two different McSum 3-step patterns were carved out, one which unfolded in a hurry from the August 1982 lows, the second 3-step pattern took about a year to complete... in both cases, the price lows printed during their respective formations were never again seen. For those who don't remember, the December 1987 SPX closing low was about 224, far above the July, 1984 low of SPX 149 during the second McSum 3-step pattern formed during 1984-85.



McSum 3-step patterns took another two decade hiatus before commencing a powerful pattern beginning in 2002 with the closing SPX low around 777 in October 2002.  The jury is still out on this McSum 3-step, but we are getting several predictions the October 2002 lows will be challenged or broken.... we'll see.

Before the bears begin the foray of breaking SPX 777 in the coming years, there is another obstacle, the price lows posted during a borderline McSum 3-step pattern in the SPX 1060 range.  The McSum 3-step pattern just barely fell short of the 2000 point range requirement, but there are other examples of 3-step patterns with a 1300 to 1600 McSum point span whose price lows held over time, but there was one that didn't thus the 2000 McSum point requirement.

 
There is currently a potential McSum 3-step pattern underway with the NYSE bond closed end funds (CEF).  We have bond CEF AD data from 1988, and have yet to observe a clean 3-step pattern, so there is no precedent of the effect a bond CEF pattern would have on common stock stock price indices, but we do know, bond CEFs have been *the* canary in the liquidity coal mine over the past few years, so there may be a message being telegraphed with this current pattern.... which 50 more McSum points to the upside will qualify as a McSum 3-step pattern.



In summary, the purpose of this thread is to point at history for the mega-bears predicting price declines that will challenge the 2002 price lows.  Anything is possible, but probability based upon 80+ years of history suggests SPX 1060 could be an insurmountable project for the mega-bears, let alone SPX 777.

FWIW

Randy
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georgesong

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Reply with quote  #2 
Thank you for generously sharing this with the forum.
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mortiz

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Reply with quote  #3 
Update on Bond CEF AD McSum 3-Step Pattern

Last week, the bond CEF AD McSum completed its 3-step pattern, nominally thus far.



A broader based AD McSum, a composite of the NYSE preferred stocks and the bond CEF components, is closing in on a McSum 3-step pattern, needing another 180 points to exceed +1000, and 140 points to exceed its previous McSum high.



FWIW

Randy

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Rightfield

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Reply with quote  #4 
Hi Randy.....I am curious if the preferred stock and bond CEF  has joined the bond only CEF  in achieving a 3 step pattern four weeks after your last update on this thread ...additionally I wanted to see if you have looked at the 3 step pattern in the volume mcsums (both in the NYSE and Naz) also over the very long term and their relationships to the AD mcsums. I ask this because i see that in your first criteria of a three step pattern you say they are based on the NYSE AD mcsum only .....as fib pointed out in last week's cumulative charts there is a potential  3 step pattern developing in the NYSE volume mcsum and the same can be said for the naz volume mcsum if the market decides to turn up from these levels (and yes I know its  currently a big and contested IF)...the naz breadth mcsum  is still short of qualifying by a few dots and i guess the NYSE breadth mcsum will qualify a real lengthy and complex three stepper if it can take out last May's high having squeezed by last October's high  by a mere 25 points...hopefully the bond CEF AD mcsum 3 step pattern will be a good precursor for the rest of the market....Thanks in advance.

RF

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mortiz

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Reply with quote  #5 
RF,

Thanks for the comments, I am preparing for travel today, so I apologize for some responses that are not all backed up with illustrations.

The broader based bond CEF/preferred AD McSum could still achieve a 3-step pattern, but it will not be a picture perfect structure, since it failed to exceed its previous high prior to a rather nasty decline currently underway... thus far the NYSE interest rate sensitive components' AD McSum has not violated its previous low from March 2008.

I had time to put together some NYSE UD volume McSum 3-step patterns over the past 70 years, and the volume 3-step variants are surprising rare.  When I return from travel, I will look into the Nasdaq 3-step patterns.

The first UD volume McSum 3-step surfacing with the volume data I have, unfolded following the Battle of Midway market low in 1942 and took until March of 1943 to complete. On a percentage basis, a powerful price move continued following the McSum 3-step pattern's completion.



The next UD volume McSum 3-step pattern since 1940 commenced in late 1953, not a picture perfect structure, but meets the 3-step criteria.  This 3-step example did not initiate at a very oversold level (below -1000), but was able to traverse over 3000 net points which is far more the minimum, so this example qualifies as McSum 3-step.



The next McSum UD volume 3-step pattern began in late 1957 and was actually a McSum 5-step structure.  This example was followed by an extended price consolidation 10 months later, but then led to another robust price rally.  This chart also has a UD volume McSum 3-step which commenced in the summer of 1962 and the structure racked up over 3500 net points before the pattern was completed.



After the 1962-63 UD volume McSum 3-step pattern, it took nearly forty years for the next 3-step pattern to emerge... initiated in July 2002.  The actual price bottoms (durring a 3-step pattern formation) usually take place at the bottom of a 3-step pattern's first correction, and this example followed the script.

Another mini-UD McSum 3-step pattern occurred following the May 2004 price lows, but did not traverse the minimum 2000 to 2200 net points. 

The current potential UD volume McSum 3-step pattern will require a very robust rally in the near future to satisfy the pattern's requirements, so it has some work to do.



As with AD McSum 3-step patterns, the price lows printed during the forming of a UD volume 3-step pattern are never again challenged.

FWIW

Randy
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traderpaul

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Reply with quote  #6 
Nice charts, Randy.....How about those bear markets?.....All the chart where bull markets....When you compare the price with a long term chart, you have to consider the players are not the same.....No day trading back in 1974.....No future on the indexes......No CBOE, .....No program trading.....No IRA etc
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fib_1618

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Reply with quote  #7 
Quote:
How about those bear markets?

By default, we are always in a bear market...the trick is finding out when this same default is being so overwhelmed where a counter market environment is able to be maintained against this same default, and the 3 step MCSUM pattern provides this insight on a intermediate to longer term basis.

Quote:
When you compare the price with a long term chart, you have to consider the players are not the same

The "players" involved have absolutely nothing to do with this area of analysis. The only historical constant is the amount of money that is available for investment in direct relation to its asset utilization.

Fib


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"As for it being different this time, it is different every time. The question is in what way, and to what extent" - Tom McClellan

"An economist is someone who sees something happen, and then wonders if it would work in theory" - Ronald Reagan

"What we see depends mainly on what we look for" - John Lubbock

"The eye sees only what the mind is ready to comprehend" - Henri Bergson

“Answers are easy; it’s asking the right questions which is hard” - Dr. Who - 1977

"You know the very powerful and the very stupid have one thing in common - they don't alter their views to fit the facts, they alter the facts to fit their views (which can be uncomfortable if you happen to be one of the facts that needs altering)" - Dr. Who - 1977

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sp112358

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Reply with quote  #8 
Just to reinforce the last comment in the reply above.  The graph below shows the 3 step McSum that materialised in due course.  Note the 3 step pattern in the box.  Interestingly, it appears to be a worldwide event - one that might be expected with globalisation and unrestricted funds flows across borders. 

So one could also expect that the McSum might look similar in all freely liquid  markets and is it therefore probable that problems in one major part of the global flow might signal problems for the other (regional) markets - note the current european problems (May 2010) and the McSum of that region declining before others.

Comments and observations welcome.



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mortiz

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Reply with quote  #9 
sp112358,

Was there a chart that was intended to be posted?  At least with my browser, it isn't visible.  You have piqued my curiosity and would be very interested in examining the not-visible-to-me chart.

Thanks

Randy

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fib_1618

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Reply with quote  #10 
Yes....a chart was there...and now disappeared.

But I was able to grab it from the server and repost it.

Gremlins...I guess.

Fib



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"As for it being different this time, it is different every time. The question is in what way, and to what extent" - Tom McClellan

"An economist is someone who sees something happen, and then wonders if it would work in theory" - Ronald Reagan

"What we see depends mainly on what we look for" - John Lubbock

"The eye sees only what the mind is ready to comprehend" - Henri Bergson

“Answers are easy; it’s asking the right questions which is hard” - Dr. Who - 1977

"You know the very powerful and the very stupid have one thing in common - they don't alter their views to fit the facts, they alter the facts to fit their views (which can be uncomfortable if you happen to be one of the facts that needs altering)" - Dr. Who - 1977

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