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Key Overbought Signal Hit Historic Highs - A Bullish Sign For Stocks

Jun. 09, 2020 8:20 AM ETSPY13 Comments
Ahan Analytics profile picture
Ahan Analytics


  • The percentage of stocks trading above their respective 40-day moving averages has only been this high three other periods since 1986.
  • Each period was a bullish rebound from a market sell-off, crash, and/or recession.
  • The S&P 500 followed each period with more gains and ended the year in even stronger position - this time should rhyme even if not exactly repeat.

My favorite technical indicator measures the percentage of stocks trading above their respective 40-day moving averages (DMAs). I dubbed it "AT40" for short (originally called T2108 by Worden2000). I use this indicator to measure cycles of extremes in the stock market: from overbought (over 70%) to oversold (below 20%) and back again. The market crash in March plunged AT40 to low single digits and generated the second longest oversold period going back to the crash of 1987. Now, AT40 has rebounded sharply and impressively. AT40 closed today (at the time of writing) at the stratospheric level of 92.1%. Since 1986, AT40 has only closed above 90% 37 trading days….keeping such rarefied company is a bullish sign for stocks.

AT40 (T2108): The percentage of stocks trading above their 40DMAs

Typically, an overbought reading is bearish. Traders should take profits on long positions and even consider shorting over-extended stocks and indices. However, I learned quickly with AT40 that overbought readings can confirm the bullish buying power in the market. In other words, this indicator cannot achieve such heights without significantly strong bullish sentiment. A look at the 37 trading days where AT40 closed above 90% before this current cycle explains the bullish implications of reaching these heights.

February 6 to March 6, 1991: 15 total trading days

The U.S. was in a mild recession from Q3 1990 to Q2 1991. The S&P 500 (SPY) gained 5.1% from February 6 to March 6, 1991, the period that included 11 trading days with AT40 closing above 90%. On March 6th, the index was 27.3% above what proved to be the final bottom on October 11, 1990. By year-end, the S&P 500 was up another 10.9% from the March 6th close, mostly thanks to a vigorous Santa Claus (December) rally. The recession became a distant memory.

May 12, 2003 to June 17, 2003: 11 trading days

This article was written by

Ahan Analytics profile picture
Dr. Duru has blogged about financial markets since the year 2000. A veteran of the dot-com bubble and bust, the financial crisis, and the coronavirus pandemic, he fully appreciates the value in trading and investing around the extremes of market behavior. In this spirit, his blog "One-Twenty Two" (https://drduru.com/onetwentytwo/) delivers a different narrative for students and fans of financial markets. Dr. Duru challenges conventional market wisdoms and offers unique perspectives. The blog posts cover stocks, options, currencies, Bitcoin, and more, while leveraging the tools of both technical and fundamental analysis for short-term and long-term trading and investing. Some of these ideas and analyses are also featured here on Seeking Alpha.Dr. Duru received a B.S. in Mechanical Engineering (and an honors degree in Values, Technology, Science and Society - now simply STS) from Stanford University. For graduate studies, Dr. Duru went on to earn a Ph.D. in Engineering-Economic Systems (now Management, Science, and Society). Dr. Duru's work experiences include:*Independent consulting in operations research and decision analysis*Management consulting in product development and technology strategy*Price optimization software for computer manufacturers and internet advertising (including a shared patent for methodology)*Business Intelligence and Data Analytics, including some Data Science and Data EngineeringConsulting practice: https://ahan-analytics.drduru.com/

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SSO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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