08/12/2011

(This is an excerpt from August 12, 2011 issue of the blog for Decision Point subscribers.)

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The Percent Buy Index (PBI) has reached levels seen only at the bear market lows in 2002-2003 and 2009-2010, and we think it has very negative implications.

At Decision Point we apply a medium-term timing model to all the stocks in the S&P 500 Index, and track the percentage of buy signals. The result is the PBI, a medium-term indicator that is useful for monitoring the direction of internal strength/weakness and overbought/oversold conditions.

The fact that the PBI has reached very oversold levels may offer some people hope that an important bottom is near, but history indicates that that would be a false hope. As you can see in two prevous periods where the PBI has gotten to these levels, the best that can be hoped for is that the formation of an important bottom may be just beginning. In those previous periods it took several months for the bottoming process to be completed.

Also note that the shape of the bottoms is completely different -- one triple bottom and one very lopsided double bottom. But I don't think these are the only kinds of bottoms (or outcomes) that are possible, or that a major bottom is the only possible result of an oversold PBI. In fact, the price decline that generated the recent low PBI readings is relatively small compared to the the two previous ones, so it is likely that we will see something completely different from what has happened before.

Considering the rapid deterioration of both price and internals, I think that a continuation of the decline to much lower levels is probable. That is to say that we'll probably see support at previous bear market lows tested before we'll see this year's highs exceeded.

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Technical analysis is a windsock, not a crystal ball. 

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 BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association. 

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Copyright 2011 Decision Point.  Nothing herein should be construed as an offer or solicitation to buy or sell any security. Past performance does not indicate future results.