Phil's Stock Market Blog

Thursday's "bounce" attempt fizzled big-time. This was not entirely a surprise; the bounce was accompanied by a pulse in the number of stocks making Climax Lows, which would tend to confirm a Climax Low signal in one or more of the major indexes, except that there weren't any to confirm.

Meanwhile, the Climax High signals are working perfectly. Things have turned bearish in a big way. The reasons and the timing can't be determined by analyzing the news, or the economy, or by watching CNBC, but technical analysis of price and volume action clearly reveals what's going on. "You can observe a lot just by looking."

The markets dived right on schedule after the Climax High signals on the 20th and 21st. The price ramped down parabolically, on accelerating volume, penetrating the 50-day xma. It was a perfect setup for either a catastrophe or a bounce attempt.

Notwithstanding my previous post, a bounce is exactly what appears to have happened. There was a pulse in the Number of Climax Highs as shown on this chart of the Nasdaq, by the blue indicator line in the 2nd indicator window. The top window shows the Number of Climax Highs in red.

I assume by now everyone has sold out and will be waiting for a while, as the market "corrects" the advance that began in March. To put it into context, here's a chart of the Dow Jones Industrials which just happens to show a Climax Low signal (in light blue) at the exact bottom. And then here's another chart, this time of the Nasdaq showing the recent Climax High signals (in red) and resulting sell-off. Note the increase in volume on the selloff following the Climax High signals. Note also that it's broken below the 50-day exponential moving average (shown in blue).

Somebody asked how we divine these things. It's simple really. We look for the Climax Low and Climax High signals in the market indexes, combined with "at or near a high, closing slightly higher or around unchanged, on an increase in volume from the day before" when looking for a top. We need a good acronym for this. Also have not worked out a computerized "flag" to display it on a chart, but it's not to hard to spot visually. I discussed it in a blog post a while back.

When it comes to tops, not to mention bottoms, there are additional signs. As a current example, are the markets extended above their 50-day moving averages? Chances are things will return to baseline. Has a rally just started, or has it been going on for months? Hitting closer to home, just look at any recent stock purchases. Are they doing ok, or are they under water?

We use the GigaScanner to cycle through a list of market indexes and ETFs representing various diversified market indexes. Signals usually occur in the majority of our charts at the same time. We take them in context of our special breadth indicators based on the Numbers of stocks doing things. Things like Climax highs and lows, up and down on Big Volume, etc. Also we watch the Leading stocks, i.e., the stocks in the Leading Stocks link in the Stock Picks page. But this is somewhat of a lagging indicator (by a few days or weeks). Being leading stocks, we find they will be the last to succumb. When they do, "look out below".

Here' s chart of the Nasdaq with Climax Highs indicated in red and Follow-Through signals in magenta.

Notice how it punched up to a marginal new high on the 14th, but didn't really go any further. The preceding rally occurred on light volume, as can be seen by the volume bars relative to the 17-day XMA (shown in green), and breadth indicators showed it lacking in supportive numbers of Climax Low signals, Up on Big Volume, etc.

Now the volume is picking up to the downside. Note the Climax High signals on Tuesday and Wednesday. A cycle through my charts of market indexes and EFTs shows them to be in similar shape.

There was a surge in the Number of Stocks Up on Big Volume indicator on the 14th, as the market indexes broke out again to the upside. I'll post a chart when I get a moment.

I'm starting to think the "top" we identified a couple weeks ago may have been strictly a short-term thing. As of this morning, before the open, the index futures appear to be breaking out to yet another high.

The early-morning action can be very deceptive, for example the markets can gap higher on the open and then sell off all day, but this time it might be real. We've noticed that leading stocks appear to be hanging in there for the most part, not getting hammered. With a real market top we will see the leading stocks starting to fail across the board, but at present all we can say that the leadership is "narrowing".

Another signal of a top: Stocks have done well for a while, and you get very bullish and go on a buying spree. But then your purchases don't do very well. It seems like you bought all the wrong stocks, but really this indicates that the market is topping out. Either that or you're a really bad stock-picker! Judge for yourself.

There was a pulse of Climax Lows on Monday the 5th which lead to a rally for a few days, as the stock indexes ran up and touched the highs set several weeks ago. But the volume was weak. On Thursday the volume increased, but the upward price progress was not great, indicating distribution.

October has traditionally been a weak month. Given the top several weeks ago, and the lackluster rally that followed, and the churning action on Thursday, we are taking a very cautious stance.

All of a sudden something makes perfect sense: Stocks always look the most bullish right at the top.

The guy on TV stated as a fact that markets were selling off today because of something the Fed said, I don't recall what. Then later on the radio somebody said it was because of the unemployment report.

As far as I can tell these are not the real the reasons. Explanations maybe, but not causes. The truth is that the markets are selling off now because of the large-scale distribution evident (in the major indexes) over the past couple weeks. First we saw several Climax High signals in a row. Then came the heavy volume without adequate price progress action at or near the highs as discussed below. That knocked the stuffing out of it.