Trader’s Narrative

Finally! We had a strong, trending market as the TICK stayed quite high throughout most of the trading day.

The latest results of the AAII sentiment came in with very bearish sentiment, which contrarians translate as bullish. The survey showed 55% bearish and 26% bullish which takes the bull ratio (bulls divided by the bulls+bears) to below 40%. This shows a nervousness on the part of the retail investors that has historically been a fantastic indicator of market buy points.

This snap back rally is not that surprising when you consider that the % above 50 day moving averages for NDX, SPX and Nasdaq composite had just recently hit extreme levels that for the most part had not been seen since the summer of 2004.

But what I was watching for was a not only a selling climax but a return of strong buyers. We now have indications of this from several sources.

For one, the VIX fell almost 10% yesterday - a behaviour that presages short term market bottoms. And today, the VIX fell almost 26% !

Second, the buying we saw today was almost indiscriminant. This gives me extra confidence as there was a sea of green across the trading screen. Even gold, which I had mentioned as a weak sector a few days ago, had gotten so beat up in the meantime that it too participated in the bounce.

Another metric which I noticed was that the breadth was incredibly lopsided towards the upside:

In fact, I think this might very well be a 90-90 upside day (as defined by Lowry’s). We’ve already had our 90-90 down day and if this is its mirror image, then we have another reason to believe this is an intermediate term bottom. As Lowry’s has shown, it is not enough for the market to get stretched to an extreme low, the bulls have to come back and take control. It looks like that is happening now.

However, after taking all that into consideration, the bulls really have their work cut out for them. As you can see, the spectacular move today only took the indices back to a resistance level in the 1260 area:

As well, there is the trendline acting as resistance.