A few quick things to discuss tonight:
The Capitulative Breadth Indicator (CBI) closed at 4 on Wednesday. When looking at CBI-based index trades the standard exit I normally discuss involves the CBI returning to 3 or lower. On January 24th and January 29th I discussed a few alternate exit techniques which entailed taking the first profitable exit on a drop to either 8 or 5. The sharp drop to 4 today combined with the high likelihood of a pullback based on last night’s study leaves me temporarily index-neutral. Subscribers to the Quantifiable Edges Subscriber Letter received emails this morning advising them of the intraday exit triggers in CBI – eligible trades. By tracking these trades, subscribers can easily estimate the CBI ahead of time. The move to 4 indicates that the majority of the capitulative breadth has dissipated. The bounce was captured and it is now time to look at some other indicators to help determine the rally’s chances.
Last night’s study which looked at explosive moves off bottoms was especially compelling for me. Almost all of the results showed similar action – a quick pullback followed by another leg up. The only pullback that lasted longer than 3 days was the 1 instance where the market failed to rally further over the short-term – 11/1/78. If three days is the expected maximum and we’ve already had one of them, then I’m not looking to stay flat much longer. I’m focusing on finding favorable long entries.
Investors Intelligence numbers for this week came in at 31.1% bulls and 43.3% bears. (Chart from Market Harmonics here.) This is the first time bears have outnumbered bulls by that much since October 16th 2002. Extreme bearish readings have historically come at poor times to be short and have coincided with or preceded some significant turning points. The October 2002 date is also an interesting comparison to now for a few other reasons: 1) Although it just missed the 3.50% necessary to qualify for the study last night, 10/10/02 saw a rise of 3.497% off the bottom followed by a strong rally. 2) As there is now, there was a divergence of new lows on 10/11/2002 that was noted in the study posted a couple of days ago.
The world will be watching and waiting for a Follow Through Day now. I anticipate posting the last of my research on this subject in the next several days.