Monday, February 4, 2008

Breadth Follow Up & CBI and Bounce Candidates Closure

Lowry's Breadth
First, a quick follow up to my post on breadth yesterday. It was pointed out to me that Thursday and Friday may have qualified as back to back 80% Days. In Lowry’s report, back to back 80% days can substitute for one 90% day at some bottoms. I said “may” qualify, because according to my data (which could be wrong)**, Thursday was a 79.61% upside volume day. This could qualify as 80% by human standards, but perhaps not by computer standards. Anyway, certainly seems close enough to quell some of the concerns I’d previously expressed about the lack of a 90% day…

Bounce Candidates Closure
Back on the night of the 21st as the futures were down about 5% I wrote a post showing that market bounces from extremely oversold and capitulative conditions typically see the most beat up stocks bounce the best – and by a substantial amount. I looked at Dow stocks to illustrate this. I also listed the 5 worst performing and best performing Dow stocks from December 26th through January 18th. The time frame I looked at for the intial move off the lows in that study was 6-8 days. It has now been 8 trading days since the market bottomed, so I thought it might be interesting to see how things played out this time. Below are the stocks I listed in the previous column along with the results:


Once again the Lowest RS stocks trounced the Highest RS stocks by more than the Dow itself bounced. In fact 4 of the top 6 performing Dow stocks during the bounce were among the 5 “Lowest RS” stocks I listed.

Capitulative Breadth Indicator (CBI) Returns to Zero
For those that haven’t been paying close attention, the CBI closed at 2 on Thursday and 0 on Friday. While I suggested taking at least partial profits earlier, Thursday’s move below 4 would have signaled the exit to the standard CBI trade I’ve discussed in the past. Below is a graph showing the action in the CBI going back to October. Buying the close on the 22nd and holding until Thursday’s close would have been worth about 5% in the S&P 500. Of course with some stock selection such as described in the Dow example above, traders may have done significantly better.




Incidentally, a zero CBI is not a signal to short. The CBI only measures "oversold" - not "overbought".
**9:55 am - Edit - I've now been told my data is in conflict with others who show 1/31 to be about 82% upside volume.

5 comments:

Anonymous said...

Rob,

Seems like your recent research has a bullish outcome to it. I appreciatte that because it makes me cautious and gets me looking to hedge shorts and hold off on intiating new ones. Evey one seems to think we are just going to stop at 1430 and head straight back down. Now while me may be rejected at that level the bearishiness that is so prevalent right now and so of the bullish research you have mentioned at your blog here seesms that at some point we are likely to crack that level and test the 200 day. I am curious if there is anything bearish that has come up in your recent studies or has most of it been bullish. I also noticed the macd crossing on the weekly chart which is usually good for more than 25 s&p points. So I am certainly cautious intiaing new shorts .

Rob Hanna said...

I keep looking for a high-probability short entry but have not found one yet.

We're overbought and will certainly pull back a bit soon, but the risk/reward for shorting doesn't seem to be there.

I suspect a pullback may allow for a high-probability long entry.

Rob

Red Hue said...

Rob,
Just some thoughts here...

Your research on low rs versus high rs stocks at market oversold extremes seems to fly in the face of many bloggers and traders "conventional wisdom". Do you get much flack or shrugged shoulders from your peers about it?

It does seem like a dangerous trade to make. I was wondering if from your research you have gleemed how important timing the bottom is to this. You had mentioned the worst stocks do not do better until the market actually turns. What is the criteria for a "turn"?

Seems like a trader could make an indicator for this by running a 5 top vs 5 bottom pairing index of sorts and enter when it crosses zero?

Thanks,
Red

Rob Hanna said...

Red,

Thanks for the comments. In order:

1)Not really. They'd need numbers to refute me. They also probably don't care what I say.

2)In studying it, hindsite was used to determine the turn date. That doesn't work in real time, so I use many of the tools I've described here (CBI, oscillators, sentiment, etc.) to help me time the turn. Trade management via either scaling in or waiting for a reversal trigger helps too. The timing IS important, though.

3) Very interesting idea. Worth thinking about...

Rob

r said...

Rob, the behavior you cite about low rs are
the first to turn is *not* mutually exclusive
vs. the canslimers:

Here's my perception of happens at bottoms:
Capitulation, followed by rises (bounces) in low RS
industry group stocks, followed by rises in
higher rs stocks.

The low rs bounces are value nibblers and
short covers.

But, here's how the IBD follow thru fits in
here: its the point at which momentum longs
start to come back in bidding up the high rs stocks.

That's probably one reason the ftd are 3-10 days after
the actual bottom: the first several days are value longs and
short covers so you can't tell if momentum longs
are back yet.