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Signs Of Coming Reversal

|About: SPDR Dow Jones Industrial Average ETF (DIA), IWM, QQQ, SPY

Summary

Long-term market Breadth data weakened, but they remain to favor the long-term Bulls.

Small Cam market sector yielded the leadership in the decline to the Large Cap.

Some signals suggesting the coming recovery.

In our weekly Market Breadth report we mentioned a week ago (https://seekingalpha.com/p/2zqlu):

"When we look 20-day and 50-day moving averages, we have clear dominance of the bearish stocks. This would be in favor of the bearish trading for the coming week."

The major indexes (S&P 500, DJI and Nasdaq 100) about 0.8% down for this week.

It has been a volatile week with strong recovery on Monday, two flat days on Tuesday and Wednesday, strong decline on Thursday and modest decline on Friday.

Now, as market ended the week on the negative note, we see following long-term Breadth sentiment (compared to past week data):

65% of the S&P 500 index listed stocks are bullish - down by 4%;
70% of the DJI index listed stocks are bullish - down by 7%;
69% of the NASDAQ 100 index listed stocks are bullish - down by 6%;
51% of the Russell 2000 index listed stocks are bullish - down by 1%;
55% of the NYSE index listed stocks are bullish - down by 1%.
Note: Bullish are stocks traded closer to their 52-week highs
Source: https://www.marketvolume.com/advance_decline/

The numbers above show that the Large Cap (S&P 500, DJI) market sector suffered  the strongest hit - here we have the strongest decline in the number of the bullish stocks. On the other hand, the Small Cap market sector (Russell 2000) had only a minor decline in the number of the bullish stocks. Three weeks ago, the Russell 2000 started the correction and now, the S&P 500 with DJI are leading it.

As we repeatedly mentioned in our previous reports, Small Cap market sector is the first to react in times of uncertainty and the current market correction was not an exception. Even you do not trade the Russell 2000 index (IWM) and you trade S&P 500 (SPY), Nasdaq 100 (QQQ),  DJI (DIA) and other index tracking ETFs, it is recommended to monitor this index on the regular basis as it could be a good guidance on what you may expect to see on the S&P 500 and DJI indexes in the near future. Now, we are starting to see calming in the bearish pressure on the Russell 2000 index and it could be a sign of coming recovery on the market.

So far, we still have the dominance of the long-term Bulls - more than 50% of the stocks listed in the major indexes are bullish. It is normal to see a decline in the number of the Bullish stocks as market dive into a correction. We should not get into panic even when we see the number of the bearish stocks overcomes the number of the bullish stocks during this correction. We should get worried when we have a recovery from the current correction and we do not see an increase in the number of bullish stocks. Until then, we are in the long-term Bull market.

For the coming week, we have following Breadth numbers:

298 of the S&P 500 stocks are above their 200-day SMAs - Bullish sentiment,
252 of the S&P 500 stocks are above their 120-day SMAs - Neutral sentiment,
195 of the S&P 500 stocks are above their 50-day SMAs - Bearish sentiment,
128 of the S&P 500 stocks are above their 143-day SMAs - Bearish sentiment.
Source: https://www.marketvolume.com/stockscreener/sp500scan.asp

The short-term Breadth sentiment is bearish suggesting the possibility of having continuation of the bearish trading. However, it is worth mentioning about extremely low advance/decline volume and advance/decline issues reading recorded on the S&P 500 index on August 17th of 2017.

Such extremely low daily Breadth readings are associated with strong panic selling across all of the S&P 500 stocks. That usually pushes the market into oversold condition when the Bears get exhausted and unless the market in the long-term down-trend (crash or recession), as a rule, we should see a recovery within a few days after that. Last time, similar extremely low Breadth data were seen on the S&P 500 on 12/10/2017 - in two days after that, the market recovered strongly.

Market Breadth charts from https://www.marketvolume.com/charts/









Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.