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mortiz

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Reply with quote  #1 
On March 5, 2007, the NYSE composite AD MCO reached a negative extreme of -94, its lowest posting since March 23, 2005.  Then on Wednesday, March 21, 2007, the NYSE composite MCO reached +57, which cannot be considered a positive extreme or initiation thrust level, but many other index AD MCOs did achieve levels which could be considered initiation thrust levels.  Some examples are the NYSE common stock AD MCO (+74) and the Russell 3000 (+77).

After seeing these positive AD MCO initiation thrusts last week following the negative AD MCO extremes earlier this month, the first thought that came to mind was a similar AD MCO pattern in May 2004.  The May 2004 AD MCO initiation thrust of +96 was followed by several additional upside SPX points, but within a few weeks, the SPX went on to post a nominally lower price low than the May 2004 price low.

Out of curiosity, decided to take a look at other times in history when the NY AD MCO posted an extreme reading below -90, followed by a positive MCO of +70 or above in the 20 trading days.  Only 6 events met that criteria qualified since 1960, so the time frame of the two MCO extremes was expanded to 25 days, providing additional data points. 

Following the the day of the positive AD MCO extreme, the price returns, as measured by SPX, were determined over the next 30 trading days.  I also noted the levels of the MCO components (the 5% and 10% trends), the AD McSum level, and the position of the cumulative AD line on the day of the AD MCO initiation thrust.

The comments in the last column of the below table designate how many ratio-adjusted (RA) cumulative AD points the RAAD line was below its previous multi-month high, and the number of months since that same AD line high.  For example, entries of "6K, 6 months" in the last column mean the cumulative RAAD line was approximately 6000 point below its most recent multi-month high, at the high was posted approximately 6 months prior to the event.



Although there were some positive price returns over the following several weeks for some of the events, on-balance, this AD MCO pattern is not typically a precursor to price gains.  Many of these events occurred in the midst of nasty bear market declines, with the AD McSums negative in all cases except the most recent event.

In addition, none of these prior events were completed on the day the cumulative AD line posted an all-time new high.  Therefore, the historical precedents of extreme MCO postings within a few weeks may not be helpful in predicting what will happen next, since the internals are currently far stronger than any of the prior qualifying events.

After uncovering the historical ramifications of these extreme MCO events, and the unprecedented underlying conditions of the most recent event, I hesitated in presenting them, but did anyway for your consideration.

It will be interesting for me anyway, to see how this one plays out.

FWIW

Randy
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jmicou

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Reply with quote  #2 
Randy,

I may need to reread this, but if the upper extreme used was 70 and the most recent upthrust was 57, what would the results be by lowering the upthrust level? If I misunderstood, then ignore this.

Regards and Thanks!

Johnny

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jmicou

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Reply with quote  #3 
OK. You did rule out the recent as an upthrust. Hmm. These results may or may not generalize to the small cap MCO behavior of recent.
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mortiz

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Reply with quote  #4 
Johnny,

The odd characteristic about the most recent event when considering the NYSE composite, was the fact its MCO only reached +57, the highest level in several months, but from an "extreme" perspective, really doesn't qualify.  However, as the MID (from one of your posts), the SPX, OEX, Russells, NYSE commons stocks, SML, and about every other index other than the NYSE composite, reached MCO levels that can be classified as initiation thrust levels.  The bond CEFs and preferred stock components of the NYSE composite list held the MCO at "just" above average levels.

I can lower the bar to +57, but it will likely increase the number of events significantly.... and it is time consuming to dig them out for presentation purposes.  I'll give it a whirl and just report the bottom line and not list each qualifying event under those circumstances.

With all of the other broad based "common stock" indices mentioned above were qualifiers and could legitimately be classified as a reasonable proxy.  Unfortunately, I don't have breadth data for most of those "common stock only" indices going back decades.

Randy


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jmicou

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Reply with quote  #5 
Randy,

Please don't go to any extra work.

In down trending or bear markets without the positive internals, it would make sense to see upthrusts that are excessive but likely made with narrowing participationa and without buying conviction.

Thanks, again.

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mortiz

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Reply with quote  #6 
Johnny,

Lowered the positive MCO bar to +57, with the following results of SPX price changes over the next 30 trading days:

5 Days Later: +0.30%
10 Days Later: -0.64%
15 Days Later: -0.15%
20 Days Later: -0.07%
25 Days Later: -0.01%
30 Days Later: +0.43%

With this most recent qualifying event having very different underpinnings than the previous qualifiers, take this study as a definite "FWIW"... but we don't know until we take a look.

Randy

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jmicou

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Reply with quote  #7 
Randy

Good work. The market just keeps on doing some unusual things. Very interesting.

Johnny

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doc

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Reply with quote  #8 
Randy,

The current event is quite unique as you pointed out with the NY AD McSum at +500 level and the cumul AD line at ATHs. I guess an interesting question would be why there aren't more examples of this scenario...

1. Is it due to the rarity of getting -90 levels on the MCO, or are there plenty of occurrances of this and

2. Is it due to the rarity of getting a +57 or +70 in the 25 days following the -90 reading within the rest of the contextual picture we have currently?

The fact that most occurances are in declining markets is not surprising as after washout selling sprees, the bear market rallies tend to be fast and furious as a generalization.

The fact that this event occurred with the internals where they are was surprising in that sense.

Doc
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mortiz

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Reply with quote  #9 
Doc,

The -90 or lower AD MCOs are not extremely rare, with 190 of those events since 1940.  I haven't checked the 1920s or 1930s yet, but I would guess there are many in that time frame due the price and internals devastation in that period.

For the record, here are the number of days in each decade since 1940 with -90 or lower MCO readings:

1940s: 56
1950s: 19
1960s: 36
1970s: 50
1980s: 18
1990s: 5
2000s: 6

So the frequency of -90 or lower MCO events appears to be a function of the underlying market conditions, was the market in a bull or bear configuration.

What makes the current event rare?  What is rare, is a positive MCO extreme closely following (in time) the negative extreme.  Normally, MCO readings lower than -90 are the momentum lows of the internals during a correction, and the actual price low typically occurs 2 to 4 months later "if" the correction is a bull market correction.

This is exactly why this latest event caught my eye last Wednesday. I have seen this before and my recollection from the few events I could remember, was the ensuing rally was not sustainable and the price lows accompanying the negative MCO extreme were tested again a few months.

What is certainly different this time, is the current condition of the McSums and cumulative lines.... thus this event has taken place in uncharted territory, like so many other rare market events over the past 2 or 3 years.

These are special times in the US markets, and I for one feel fortunate to be around to witness them... regardless of the ultimate outcome.

Thanks to you and Johnny for your feedback.

Randy
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jmicou

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Reply with quote  #10 
Given the Zweig signal recently and the configuration of the COT, a crash seems unlikely. This may be a process take a while, but it seems more likely that another leg up is in the cards. Any test or beyond the lows would be a buying opportunity.

One bearish thing ST, got a daily sell signal for the NDX at Friday's close and ignored it. Wanted to see how today would look. Bought some QID for protection. Such trades will be based on signals. If there were more buying interest, by midday, the signal would reverse.

The market may be a sideways market with a fairly wide trading range (the highs and lows of recent) until the trend establishes itself.

Johnny

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jmicou

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Reply with quote  #11 
The signal did reverse and the protection removed. See how the internals look. If they could develop energy, such as the MCOs while the market exhibits some sort of floor, then things could get interesting.
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jmicou

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Reply with quote  #12 
Signal went back to sell at open. Not suggesting making trades. We may be in for more chop and whipsaw. Gonna be on the road today.
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