The percentage of major exchange listed stocks above their 20 and 50 day moving averages has fallen to levels that have been associated with bottoms in the market.
Click on the chart to enlarge it…
The middle pane of the chart is where we find the percentages.
- The green line is the percentage of stocks trading above their 20 day moving averages. It is registering 14.73%.
- The red line is the percentage of stocks trading above their 50 day moving averages. It is registering 19.96%.
While the chart clearly shows that these levels have been strongly associated with bottoms, I decided to run a test to be sure. The green and red arrows in the graph above show the buy and sell points, which are specified in the buy rules below.
Buy SPY at the close if:
- the percentage of stocks trading above their 20 day moving averages is less than 15% AND the percentage of stocks trading above their 50 day moving averages is less than 20%.
Sell X days later. No commission or slippage included. All SPY history used.
While volatile, the results are very bullish. There are 54 occurrences of this setup, but the samples are reduced to 17 when the trade is held for the full 50 days.
Let’s roll the chart back further and examine a few more years worth of trades.
Save for the trade made in September 2008, this setup has been remarkably successful at identifying turning points.
Note the spikes in volume which occur near or on the exact same day as the buys. Scroll back up to the first chart and you’ll see that there was a spike in volume on Friday, but it was not nearly has strong as previous volume spikes. That worries me a bit. It is possible that we have not yet had enough capitulation for a bottom, but this study shows that we are likely very near to one.