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Bullish Reversal Signals

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

Last week we stated:

  • ... All of these suggest the higher odds of having another red week.....

This week was red indeed: the NASDAQ 100 (QQQ) lost 3.27%; the S&P 500 (SPY) is down 4.11%, and the Dow (DIA) suffered 4.21% weekly decline.

As the market decline, the Breadth sentiment weakened as well:

  • 44% of the S&P 500 index listed stocks are bullish - down by 16% from the week ago - Bearish sentiment;
  • 57% of the DJI index listed stocks are bullish - down by 20% from the week ago - Weak Bullish sentiment;
  • 44% of the NASDAQ 100 index listed stocks are bullish - down by 14% from the week ago - Bearish sentiment;
  • 34% of the Russell 2000 index listed stocks are bullish - down by 12% from the week ago - Strong Bearish sentiment;
  • 30% of the NYSE index listed stocks are bullish - down by 10% from the week ago - Strong Bearish sentiment.
    source: Advance Decline Charts

The number of the long-term bearish stocks increased strongly all across the market. The DJI index is the only one where more than 50% of the listed stocks could be considered bullish.
It is natural to see an increase in the number of the bearish stocks during a correction. At this point, we can talk about a correction only. However, the long-term market Breadth is bearish. Even we have a bounce up, for as long as we have more than 50% of the NYSE stocks in red, the long-term sentiment should be considered bearish.
The same as a week ago, our long-term market outlook is bearish. During this period the odds of a recession or a crash are elevated. Last time, in 2015-2016, the NYSE sentiment was in red for 9 months. We had prolonged side-way and volatile trending, yet, the bearish mood did not grown into a recession at that time. Still, the history suggests to stay out of long-term buying during such negative Breadth sentiment. It is better to be safe than sorry.
NYSE Breadth chart

Short-term market Breadth suffered a strong hit as well in both Large Cap (S&P 500) and Small Cap (Russell 2000) market sectors:

  • 40% of the S&P 500 stocks are above their 200-day MA - down by 18% - Bearish,
  • 35% of the S&P 500 stocks are above their 120-day MA - down by 19% - Strong Bearish,
  • 15% of the S&P 500 stocks are above their 50-day MA - down by 22% - Strong Bearish.
  • 46% of the Russell 2000 stocks are above their 200-day MA - down by 13% - Weak Bearish,
  • 38% of the Russell 2000 stocks are above their 120-day MA - down by 10% - Bearish,
  • 11% of the Russell 2000 stocks are above their 50-day MA - down by 15% - Strong Bearish.
    https://www.marketvolume.com/advance_decline/market-breadth-charts.asp

This week mini-crash pushed short-term market Breadth down. The Breadth numbers are bearish on all short-term timeframes. However, last day of the week brought some release in the Large Cap sector - we recorded an increase in the number of the bullish stocks. On the overall bearish background, the Large Cap sector is entering the next week on a positive momentum. Also, during this week decline, we saw extremely low (bearish) Breadth readings. Such extreme numbers are usually associated with an oversold condition and they usually could be seen before a bounce up.
S&P 500 Percent above 50-day MA

It is worth mentioning about a strong volume surge during the recent decline. High volume was witnessed all across the market. This reveals that the large wave of the institutional traders was buying during the recent decline. The strong drop attracted the Bulls. The main question is whether these Bulls would be able to stop the decline. By comparing the recent volume surge to the previous surges during the recent corrections, we may say, that the current bullish wave is strong enough to cause a strong bounce up at least.
Chart #5: S&P 500 index volume chart - 1 bar = 1 day

In summary, the next week outlook is slightly in the favor of the Bulls. We have strong bullish reversal signals, suggesting the high odds of a bounce up. We are not talking about a recovery and resuming of the Bull market. At this point this is about a bounce up only.
With rising volatility it is recommended to monitor charts on a daily basis. If we have a bounce up and we see a strong increase in the number of the bullish stocks then we may talk about a recovery. If a bounce up does not affect Breadth numbers strongly, then the odds are of the side of having another slide down later.

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