Tuesday, October 07, 2008

Has the S&P bottomed?

Yesterday I had looked at the relationship between the S&P and its key moving averages. But how will this relationship be effected by the current technical and breadth picture.

The S&P Bullish Percents have reached extreme lows. Only 8% of S&P stocks are on point-n-figure buy signals, this far exceeds the 16% lows following September 11th, and the 15% of the Asian Currency Crisis. In both the aforementioned cases these lows marked the week the S&P bottomed.

However, in each case technicals - stochastics in particular - were oversold. This is not the case now:

So it may take a second week (and new lows in the Bullish Percents?) to firm the bottom, running in line with my thoughts from yesterday.

The Summation Index is another indicator suggesting a bottom may not be in place. Thankfully it is in oversold territory, but historically it has room to fall before reaching record lows. However, the VIX is at new extreme highs - so we may instead be looking at the development of a bullish divergence in the Summation Index which would be very good news for bulls.

This week could see the NYSE Summation Index break below -1,000 and firm a bottom. But the VIX looks to have peaked which favours an S&P bottom this week - if not already in place from Monday.

Lots rides on Tuesday's action. If we open lower and fail to rally beyond the opening half hour then there will likely be another run on Monday's lows which won't attract buyers. If the market rallies irrespective of the open move then Monday's lows become a very attractive entry area on future weakness. The latter situation would play better for a bottom next week.

Futures point to a weak open. We'll see what happens.

Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts and stock charts website