It’s looking like the market is ready for a bounce. The nature of any bounce will tell us whether we should expect new highs or if the rally will fail. Here are some of the critical charts I’ll be watching over the next week or two.
A chart I show often when the market is starting a move lower is the ratio between near term volatility (VIX) and mid term volatility (VXV). Spikes in this ratio show immediate fear is greater than longer term fear. They are usually associated with an event or a sudden recognition of danger by many market participants. When the market bounces out of a short term low this ratio can help us determine if near term fear is subsiding or lingering. Over the next few weeks we want to see it fall below .9 to give the all clear signal. If it can’t move below that level the odds favor more downside ahead. This indicator couldn’t clear the warning two weeks ago and signaled that fear was still lingering.
The NYSE advance/decline line (NYAD) turned back up this week. It shows people buying the dip. It will be critical over the next few weeks for this indicator to move back to the highs. If it doesn’t confirm an upward move in price it will be a strong indication that a top is being built.
The market is 3% off its all time high. That dip broke 14% of point and figure charts. The bullish percent index (BPSPX) gives a longer term view of charts with bullish patterns. I get concerned when this indicator falls below 60%.
The percent of stocks above their 200 day moving average rebounded sharply this week even though the market’s bounce was small. This suggests that people were buying the dip in many stocks near their 200 dma. It indicates that the market is due for a bounce. I use the 60% mark to signal caution so we want to see this indicator recover with a rally.
Social media momentum is painting a positive divergence with the S&P 500 index (SPX) and is an indication that active market participants are starting to nibble. You can see the full details here.
There are plenty of signs that the market is due for a bounce. The indicators I’ve shown above need to show strength with that bounce. If divergences appear with the rally it will warn that more downside is ahead.