Let's look first at this chart of RPV (this is the Rydex S&P 500 Pure Value ETF, representing the "value" sector):
The purple paintbars indicate so-called Pristine buy signals, which are based on a special type of oversold price action. More noteworthy are the blue Climax Low buy signals, which are based on volume as well as price action. There are three Climax Low signals altogether; each one picked the low perfectly, and lead to a respectable (if not permanent) upswing.
The most recent Climax Low signal, around the beginning of October, had tremendous breadth across our database of approximately 3000 stocks. There were a total of 1530 symbols generating Climax Low buy signals on that day, which is indicative of a major market turning point. It's evident by the huge spike in the blue indicator line in the top window of the chart, which shows the daily number of Climax Low signals across the database. Most all stocks moved directly upward over the next couple of weeks, by approximately 5 - 10%.
The red indicator line in the second window shows the total daily number of Climax High sell signals. As I've stated before, in an uptrend, markets will experience numerous temporary bouts of selling on the way up - and this is what's been going on ever since the turning point at the beginning of October. The red line shows the waves of selling as prices moved up.
As an uptrend continues, eventually the waves of distribution will get to be too much, and the trend will be broken. This seemed to be happening a few days ago, with the fall of AAPL (Apple Computer) as it responded to the most recent red Climax High sell signal. It got slammed back down to support two days later, and it seems to not be bouncing back. Here's the chart:
But let's take another look at the chart of RPV above. After the upward move off the inflection point at the beginning of October, eventually, there was the red Climax High sell signal. But unlike with AAPL, it didn't go down.
Keep in mind that Climax High signals are not as robust as Climax Low buy signals. You can't just sell every signal that comes along; they need some interpretation. They work well perched atop an up-streak, in a choppy-looking pattern, or when the price is extended a ways beyond support. However, when a stock is in a basing pattern, and prices are tightening up, and bumping up against previous highs, we tend to see Climax Highs appearing at the so-called "pivot point", from which an upward breakout may be imminent.
With RPV that's exactly what happened. Two days after the sell signal prices jumped, taking out the high of the signal on a nice increase in volume. In this context the sell signal becomes a contrary buy signal, and on a fairly broad market index.
Numerous individual stocks are acting in a similar fashion, at least in general. Below is a chart of Linear Technology Corporation (symbol LLTC). This is not one of the strongest stocks around. It had a Climax High sell signal several days before RPV, and instead of a breakout, it apparently has lead to a bit of a bullish consolidation. Here's the chart of LLTC:
Leading Stocks versus the Market Indexes
So, what does it mean when one of the major leading stocks (AAPL) is getting hammered, but the broad stock indexes are acting well? I guess it means the particular stock has had it's day, but the market is still bullish. Or, maybe AAPL will get another buy signal sometime soon. And the market is still bullish.
Next up is a chart of the Dow Jones Industrial Average:
Unfortunately the volume feed for the Dow Jones Industrials is broken (I keep trying to get our data vendor to fix it, but to no avail) - so any Climax buy and sell signals won't be visible. However, the breakout from a recent cup-with-handle basing pattern is clear. Note also that Friday's action had the price cutting cleanly above the 200-day Exponential Moving Average (it's the red line - blue is the 50-day XMA). I think by the classical definition this puts it in Bull territory again.
This kind of behavior in the indexes (and in a number of individual stocks) is pretty bullish. The inflection point at the beginning of October lead to a nice uptrend, and now we appear to have survived the first correction attempt with flying colors.Notwithstanding AAPL computer, things are looking pretty bullish overall.
How To Trade
Just a note on how to trade (on the buy-side). In conditions like we have currently the New High Breakouts will be the ones to trade, CANSLIM fashion. Things like Climax Low buy signals tend to happen when stocks are off their highs. The stocks making new highs tended to show Climax Low signals a few weeks ago. Right now stocks showing these signals tend to be laggards, unless the signal appears on a stock near it's highs, in a decent uptrend.