Over 10% on the S&P 500 index
by trading mid-term advance/decline indicators

In the first half of 2006, there were 4 instances where the S&P 500 index reached critically low A/D issues and A/D volume ratios (see table below).

Table 1. Lowest critical A/D volume and A/D issues ratios in 2006. S&P 500 index. Date Critical A/D  Issues Ratio Critical A/D  Volume Ratio Magnitude of Uptrend  (Recovery Rally) Chart and Point Reference 06/12/2006 0.12 0.12 *6.1% Chart #1 - C 06/05/2006 0.05 0.05 0.6% Chart #1 - B 05/17/2006 0.09 0.12 1.6% Chart #1 - A 01/20/2006 0.11 0.09 5.2% Chart #1 - A Copyright © 1997-2006 MarketVolume®

*At the moment this report was issued

In December 2005 and January 2006, the S&P 500 traded mainly sideways. Only in February 2006 did the index resume the mid-term uptrend it had begun in October 2005. On May 11, 2006, the index changed direction sharply and started to move down. In the middle of June, the S&P 500 reached a key support level and began a new uptrend.

As of January 2006, we noted two strong uptrends. The index generated a mid-term run higher after critically low A/D ratios readings had appeared.

Chart #1:   S&P 500 lowest critical A/D volume and A/D issues ratios. January 2006.

 

Chart #1 - Point A:

On January 20, 2006, the S&P 500 index declined by approximately 2%. After reaching critically low A/D issues and A/D volume ratios on that date, the index started a recovery the next session. In February 2006, the S&P 500 declined again; however, it slid only about 0.5% below its January 20 level. A reversal to the upside then followed where the index recovered 5.2% by the middle of May, 2006.

 

Chart #2: S&P 500 lowest critical A/D volume and A/D issues ratios. May - June 2006.

 

We saw 2 strong recovery rallies following critically low sentiment readings.

Once again, our Advance / Decline indicators prove that during a downtrend - when we see the A/D issues ratio fall below 0.12 and the A/D volume ratio decline to similar levels - we can confidently anticipate an upside reversal. The strength and duration of the ensuing up-move will depend on how substantially the index had declined.

Furthermore, extremely low sentiment readings are a perfect indicator to define the end points of a mid-term downtrend; this information can be used successfully for mid-term trading applications (click  here to see our research results).