Friday, August 5, 2011

Historic Sell Off - Historic Indicator Readings

Click on the chart to ENLARGE
As discouraging as the current market is for those long stocks, including myself, I think a look back at history should bring some comfort when all appears hopeless.
The current reading of the True Strength Index (TSI) indicator on the daily chart of the Standard and Poors 500 (SP-500) is -0.84. I have looked back at the TSI readings for each day beginning Jan 1, 1990. There were, in those 21 years, only 3 days that the TSI reading was as bad or worse - April 4, `94 (-0.91), September 21, `01 (-0.90) and last summer July 2, `10 (-0.83).
And for what it's worth, in each of these three cases, those days were the low SP-500 price for many months that followed. Which is to say, there was a significant window of time to sell at a higher price.
I often use the MoneyFlowIndex (MFI) indicator in conjuction with the TSI (7,4) indicator. For this I prefer the MFI (10) setting.
The MFI indicator measures volume flow and compares it with the change in price. Normally, when money flow peaks, stock price peaks - and when money flow bottoms, stock price bottoms. I will tell you that this indicator does not work perfectly - but it does give one a very good rough estimate of what is going on.
The MFI (10) reading for the SP-500 daily chart is now ZERO (0). Again, I went back and looked at each and every day beginning in 1990.
Guess what?
The MFI (10) has NEVER closed at ZERO. It has had a closing reading or 5 or 6 several times, but never 0.
So, make of this information what you will. For myself, I will hang on to my long positions because I think the evidence is that this situation has reached an extreme that will be inevitably reversed.


  1. Divergence work but sometimes we may face big drawdowns. Also the 3x ETF compound the drawdown (and the eventual rebound). Picking bottoms and tops is hard.

  2. John. I had never heard of TNA. But, since you discussed it, I thought it was worth a look. This morning I bought some at 47.90. It just looked like it was ready for a dead-cat bounce. Because I have a pre-Intel-chip Mac, I cannot use TSI, and I have nothing but experience and regular charts to rely on as to when to sell. Well, I just sold it at 53.92. So, thanks for acquainting me with it.

  3. Loren - I am smiling! That is about a 10% skin...probably more. Way to go!!

    Sometimes I think that when I am not making money in the stock market, it means that anyone reading my blog is not making money either - and that is very discouraging.

    But I am finding out that is not true. I often do not take my own advice and then I get emails or posts from people who did think about what I wrote, acted on it and they made money.

    Congratulations! You made my day.

  4. Hi John,

    Im also on the boat too with TNA,
    do you have any time frame on SPY to recuperate to higher numbers and is 72.50 still your target.

    PS. appreciate your effort, your a saint.

  5. Anon - thank you for expressing your appreciation of my efforts. I appreciate that.

    My studies have shown me there are a couple ways this could play out. If the Fed were to hint at QE3 sometime real soon, you would get a V shaped recovery. SPY would literally go up as fast as it came down. The other way this could go is that price meanders around for a couple of weeks - essentially sideways to lower - then gravitates higher when there is news that QE3 will actually happen.

    An example of the former would be July `10 and an example of the latter would be February '10.

    I'm presuming we are now in roughly the same situation as January `08. That is, The S&P has fallen convincingly through its 200 dma and below a previous significant level of support - telling everyone listening that we have entered a cyclical bear market for stocks.

    The powers that be will try desperately to get the stock market to rebound and it should reach back up to and just above the 200 dma. People will then think all is well, when in fact, all is very NOT well.

    After that, no amount of smoke and mirrors will fool anyone anymore - and that will not be a pretty sight.

    But to answer your question, sorry for the rambling, yes I do continue to view 72.50 as a viable target. My breakeven is around 64.50. I may very well decide enough is enough and just get my money back, take my ball so to speak, and go home. I'll have to make that decision if/when the time comes I guess.

  6. Hi John,

    Been a lurker of your blog and knowledge for several months. Just want to say that it has been a very valuable resource. Keep up the stellar work.

    Next week sure makes me anxious. I think that we are very close to a near term bottom. We had a pretty good headfake with the debt ceiling agreement where a good number of people geared up to go long to catch a relief rally, then realizing that macroeconomically the US, Europe and Japan have some major problems.

    So Jackson Hole is next Tuesday. And the consensus I'm reading is that QE3 will be announced. I'm not too sure about it. My feelings lean towards that QE3 will be an option worth considering by Bernanke, but there will be nothing concrete. I just feel like it hasn't even been two months since the end of QE2... there needs to be more buy-in of QE3 which can only be accomplished by deflating all assets.

    I guess the reasonable assumption to go long next week is a higher probability of success given a near term bottom, and relief rally from the mutter of QE3 at Jackson Hole. Longer term, it might all be a headfake... that H&S pattern on the S&P is so clearly painted.


  7. John, what would happened if the government downgraded the S&P ?

    It looks like is going to happen in the near future.

    Thank You

  8. What a week!
    John, just curious, what do you teach and what gradesÉ

  9. MrM - what a week, you're telling me! My job assignment for the past 8 years has been 5/6th grade Orchestra.

    Anon #2 - Minutes ago the S&P rating agency downgraded the US credit worthiness from AAA to AA+. That is probably what you are asking about. I read that this, in addition to being humiliating, raises the interest rates on our government debt - will make it more expensive for our government to fund our national debt credit card. Presumably it will (or could) cause the stock market to get even more depressed next week. It's not a good sign, that I am quite sure.

    Sam (aka Anon #1) - you are a skilled articulate writer. And thank you for keeping an eye on me.

    When I found out overnight a day or two ago that Japan was going to intervene to support our currency and debase theirs, I knew it would not be good news for our stock market. Apparently they did not intervene today, so they are reported, and the dollar was falling like a rock all day, despite the negative action in our stock markets. Oh, and I also read something about the BofJ promising to buy more of their debt in the near future to further debase their currency against the US Dollar.

    Now we have the S&P downgrade within this hour.

    Interesting you mention Jackson Hole. If the stock markets further freak out Monday on the S&P downgrade, along with the avowed currency war introduced and being executed by the Bank of Japan, I think Ben will have all the ammo he needs to freak out himself and hint at some variety of QE3.

    If I remember correctly, it is very common in a head and shoulders pattern for price, once fallen through the neck line, to retest that neck line one last time. If so, a rebound bringing the S&P back up to around 1265 or even 1270 would not in any way violate the rules of the pattern.

  10. Hi John,

    During the week you posted a weekly chart of the S&P showing a downside target of 1150. Do you have an idea of the timing of reaching that target? I am not able to get the software for the TSI charting to work on my Mac. I download the software but it does not seem to initialize and work. Do you have any suggestions?

    Your work is terrific,



  11. Hi Michael and thanks for the compliment.

    I know of others who use a MAC and are able to enjoy using I suspect that you may not have Microsoft's Silverlight installed, or installed correctly.

    To check this out:

    Honestly, I do not have any idea of the timing for the S&P reaching 1150. There are two possibilities, but I do not know which it will be.

    Possibility #1 is that it happens on Monday/Tuesday.

    Possibility #2 is that it happens in a couple months - after the S&P briefly regains the 200 dma and then begins to plummet.

    I hope you get the software working for you. It really is a lot of fun to use.

  12. John. Regarding the ability of Mac to run Silverlight, it boils down to this.

    About 5-6 years ago, one of Apple's computers was the iMac G5 which they called the "Tiger". When I bought mine I was told that I could wait a couple of months and get the new "Leopard" that was coming out. This new computer would have the Intel "brain". I went ahead and bought the "Tiger". So I have Mac OS X version 10.4.11 which will not accept the Silverlight software. All versions of the Mac after System 10.4.11 have the Intel chip and, to the best of my knowledge, will accept the Silverware application.


  13. Well heck Loren - you are doing GREAT without the TSI. One alternative is to just forget about it! A second alternative is to pony up $500 to buy a cheap new PC and be good to go for another 5-7 years. And a third alternative is download the software at

    I don't know if there will be any compatibility issues with the third alternative. I do, again, know folks who use a MAC and have no problem with this software. It does have TSI and a whole lot of other stuff.

    If you give the third alternative a whirl, jump through their hoops until you have a username and password assigned to you. Then, back out and reenter the site anew and give your username and password when prompted. You should then be able to download the software and go from there. Let me know if you hit any snags, OK?

  14. Hello John,

    Voice from the past.

    Really would like to hear your thoughts on what happens in the market monday because of the downgrade.

    I heard a lot of "it's factored in" - I don't buy that.

    US to EU - we are not in Kansas anymore.

    Thanks John.