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Point & Go Figure: Context Shift?

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Just once, take my side!

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With a late surge on Tuesday afternoon, the percent of stocks on the NYSE on point and figure buy signals (the NYSE Bullish Percent Index), reversed up to a column of Xs. This is one of two primary long-term indicators I look at to evaluate overall market context. Let's look at where we stand with this indicator and see whether this reversal to Xs suggests a shift to a more neutral context, a positive context, or just more of the same.

NYSE Bullish Percent Index

The simplest reading of this chart is, "Hey, we're back in a column of Xs, time to put the offense out on the field." Nothing wrong with that. Simplicity on Wall Street is vastly underrated. But since this indicator is not a directional indicator, but a risk indicator, we want to see what it is saying in terms of overall risk, and evaluate it in conjunction with the other pieces of the puzzle.

There are a number of important aspects of this chart that I want to point out:

First, note how the long-term deterioration in the percent of stocks giving a new point and figure buy signal continues to diverge from the major market indices. This indicator peaked in January 2004, and has been making lower tops on each successive rally.

Of more concern is the fact the NYSE BP gave an outright sell signal, a triple bottom break in October; its first outright sell signal since August 2004. Before the August 2004 sell signal, which was rather quickly erased by the buy signal in November 2004, the most recent sell signal was July 2002. The reversal up does not change that sell signal.

Another important piece of the long-term puzzle is the Nasdaq Bullish Percent, which remains negative, in a column of Os, and still nearly 2% away from a reversal up.

Meanwhile, in the short-term, the percent of NYSE stocks above their 50-day moving average is positive, but moving into overbought territory having rallied to 64% from a low in October of 22%. As well, this short-term indicator is diverging from another short-term indicator, the NYSE High Low Index, which is a measure of underlying NYSE market health. With the S&P 500, the Dow Industrials and the NYSE Composite Index all moving above August highs, this indicator should be confirming those moves. Instead, it is not simply not confirming the new highs, it remains negative in a column of Os.

NYSE High Low Index

Meanwhile, a more intermediate measure of market health is the percent of NYSE stocks above their 200-day moving average. This indicator is positive, but like the NYSE High-Low Index, so far has not even been able to move above the August highs. This is another warning that the higher prices we are seeing in market indices are great on the surface, but weak internally.

So, to sum up, the NYSE Bullish Percent has reversed up, but remains on a sell signal, making lower highs, while the percent of NYSE stocks above their 50-day moving average moves closer to overbought territory from a low level, the NYSE High-Low Index remains negative, and the more intermediate percent of NYSE stocks above their 200-day moving average is diverging from the broad indices.

What would it take to change the context back to bullish? Very simply, less risk. That means fewer bulls, the short-term indicators confirming the long-term indicators and displaying underlying health in the broad market indices, not diverging and showing inherent weakness.

Can we rally here? Absolutely. We've rallied significantly already from July. Remember this contextual indicator is not a directional indicator. It is a risk indicator. And what it is saying is that risk remains high.

Sometimes risk can be reduced as a function of time. More often it is reduced as a function of price. The greater the divergence we see here in these indicators, the more likely the risk reduction takes place in terms of price.

All charts courtesy Dorsey, Wright.

No positions in stocks mentioned.

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