Thursday, December 18, 2014

When V Bottoms Are Not V Bottoms

Well, here we go again:  another V bottom!  Stocks rallied sharply yesterday and are up substantially in overnight hours to add to gains.  But perhaps V bottoms are only V bottoms if we focus on price.  Might there be changes in momentum patterns that precede the price reversal?

Above are a few things I've been focusing upon.  The top chart is what I call the momentum curve:  it depicts the percentages of stocks in the SPX universe that are above their 3, 5, 10, 20, 50, 100, and 200-day moving averages over the past several days.  (Data from the Index Indicators site).  What we can see is that the percentage of stocks trading below their shortest moving averages (3 and 5-day) actually bottomed ahead of price.  (They actually hit their lows on 12/10).  There was no V in short-term momentum.

In the middle chart, we track the number of NYSE stocks closing above their upper Bollinger Bands vs. those closing below their lower bands.  (Data from the Stock Charts site).  The number of stocks closing below their bands peaked on 12/12 and did not confirm the actual price lows.

In the bottom chart, we track the number of buy vs. sell signals across all NYSE stocks for the Commodity Channel Index (CCI).  (Data from the Stock Charts site).  It, too, hit its lowest downside point on 12/12, prior to the price lows.  

What I'm seeing is that, recently, tops have been distinguished by price divergences; bottoms have been characterized by momentum divergences.  It's an observation and hypothesis only at this point, but one that warrants further investigation and testing.

Further Reading:  Bollinger Balance