Triple Top or Double Bottom? Analyzing the S&P 500… 04/19/2016


S&P 500

A few months ago the market and leading growth stocks were collapsing all around us and you would have been hard pressed to find anyone that would say we would be rapidly approaching all-time highs on $SPY only a few months later, but here we are.  Interestingly, the monthly chart can be viewed as both bullish and bearish.  The bulls will point to an imminent breakout from a double bottom base while the bears will call this a potential triple top.  So which one is it?  

A look under the hood…

When determining market direction, it’s always important to consider both technical and fundamental aspects of the equation.  The fundamental aspects which count the most are the ones that actually drive markets higher and lower…namely the number of stocks making new highs vs new lows, the number of stocks setting up (particularly grow stocks), and the number of stocks passing our scans.  Simple logic tells us that if we build several scans that return high quality growth stocks, it stands to reason that as the list expands and contracts, so should the internal strength of the market.  From our studies, it turns out that this is indeed the case.

New Highs vs New Lows

The below chart was taken from our proprietary tool ChartYourTrade MRI.  It automatically aggregates the number of new highs vs new lows on the Nasdaq and NYSE everyday.  We’ve created the charts below based on them.  

As we can see, the number of new lows made from July through September and November through January foreshadowed the major declines on the indexes.  In the middle of February we saw a major dry-up in the number of new lows being made that later launched the run we have seen since then.  

The question is, will this run continue?  Will we break into new all-time highs?  My theory, if we do break out to new all-time highs, the number of new highs being made on the NYSE and Nasdaq will continue to expand while the number of new lows remains extremely low as it has since February.  If we roll over, we’ll likely see a quick dry up in new highs just as we did before the market rolled over in August and January.

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Expansion in stocks passing our scans…is it enough?

As noted earlier, one of the key aspects under the hood that helps us understand market direction and really market health is the number of stocks passing our scans.  The below chart is an aggregate of the stocks passing all of our scans from our ChartYourTrade MRI Scanner.  

Starting in April of last year we saw a steady decline of stocks passing our scans.  Not so coincidentally, it wasn’t until mid-February that we finally saw the number of stocks passing our scans begin to perk up.  Interestingly, over the past two weeks we have seen a dramatic increase in the number of stocks passing our scans, the most we have seen since last August.  This is certainly a positive sign for the current health of the market.

Should conditions begin to deteriorate, we will likely see a rapid decline in the number of stocks passing our scans just as we did in August and January.

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