When the volume line is not enough

MULTIPLE SIGNS OF A BEAR

In the last article, I talked about the Climax (CLX) Indicator and the important role it plays in determining the direction of the markets. You'll recall that the overbought level was in the +20 area and the oversold level in the -20 area. You'll also recall that to calculate the CLX we use the top 30 stocks on the TSE, NYSE, and Nasdaq, that is, the most heavily weighted because they pretty much determine the direction of the markets.

Climax vs Volume Line

So, why do we need the CLX when we have the volume line? Well, the volume line doesn't always give buy and sell signals. Oftentimes it simply moves up and down with the index. That's where the CLX comes in. Normally the CLX will make a low before the market does. Then the market will move lower and the CLX will fail to make a new low thus failing to confirm the index low, what we call a downside non-confirmation. Conversely, normally the CLX will make a high before the market does. Then the market will move higher and the CLX will fail to make a new high, an upside non-confirmation. In other words, the CLX acts as an oscillator to tell us when the volume line is running out of gas in either direction and thus helps to identify turning points.

NYSE

Climax. In New York, the NYSE CLX reached oversold territory at -20 on March 16, 2001 with the Dow at 9,823. (I'm using the Dow here because it's familiar to everyone). A week later, the Dow went down to 9,505 but the CLX came in at only -11. In other words, prices were lower but the CLX failed to make a new low indicating that selling pressure was abating. That fact was not evident from an examination of the NYSE's or Dow's volume lines because they kept confirming the lows in the indexes and gave no buy signals..

From the bottom at 9,505, the Dow rallied to 10,810 on April 27 with the CLX recording an overbought +20. Two weeks later, the Dow was higher at 11,302 but the CLX reading was only a + 17, an upside non-confirmation and a strong indication that buying pressure was abating. The market had thus come full circle from oversold to overbought. The volume lines gave no sell signals but the CLX did its Job.

Now, no technician worth his or her salt ever relies on one indicator no matter how good it may look. No one indicator is perfect and it's too easy to get fooled. So, we keep an arsenal of indicators and compare them to see if most of them are telling us the same thing at the same time.

A-D Ratio. At the bottom in March, while the CLX was recording its downside non-confirmation, the 5-week A-D Ratio (you remember that one) bottomed at 43.6% on March 23, not quite oversold but close enough. You can't be too picky. Then it took off on the upside to a very overbought 63.7% on May 18 which, by the way, occurred at exactly the same time as the CLX recorded its + 17 upside non-confirmation. When the 5-week A-D Ratio gets in to overbought territory and then drops back out of it, it signals a decline in the market. Well, on June 15, it did just that

Groups Bullish. Another important indicator I follow is the percent of Groups Bullish (GB), groups being Airlines, Banks, Mines, Oils, Steels, etc. I simply keep track of the number where the volume lines have given buy signals. When you get too few buy signals, ie., less than 30%, the market is oversold and ready for a rally. Conversely, when you get too many, ie., more than 70%, the market is overbought and ready for a decline. On March 23, the GB had dropped to 20.9% - too few; by May 18, it had rallied to 76.8% - too many. And guess what. The 76.8% happened at exactly the same time as the CLX recorded its +17 and the 5-week A-D Ratio its 63.7%. The GB dropped back : out of overbought territory on June 15 thereby signalling a decline.

NASDAQ

Climax. The CLX recorded a very oversold reading of -24 on March 9 with the index at 2,053. On April 6, the index made its low at 1,720 with the CLX at only -15, a big downside non-confirmation. The selling pressure had abated. Then the index took off like a rocket. Within only two weeks it had soared 26% to 2,163! At that point the CLX recorded an overbought +19. By May 25, the index was higher at 2,251 but this time the CLX was in negative territory at -3, a huge upside non-confirmation and a big loss of strength. All told though, a pretty impressive rally of 31% from April 6 to May 25, again not signalled by the volume line but the CLX was johnny-on-the-spot.

A-D Ratio. While the CLX moved from one extreme to the other, the 5-- week A-D Ratio moved up from a very oversold 35.2% on March 23 to an overbought 60.6% on May 11. It has since dropped back out of overbought territory.

Groups Bullish. The GB got down to an extremely oversold 2.8% on March 23 but the best it was able to muster on the upside was 57.8% on May 25, well short of overbought territory. It nevertheless rallied 55% to the NYSE's 55.9%, so virtually the same amount.

TSE

Climax. In Toronto, the same extremes as in New York were not seen. The lowest reading for the CLX was -12 on March 16 with the TSE 300 at 7,752. On April 6, the index bottomed at 7,475 with the CLX at only -5.

By May 18, the TSE had rallied to 8,271. The CLX reading was +14. A week later, the index moved higher to 8,293 but the CLX only managed a +5, a significant loss of strength. While the TSE's CLX never got to either - or + 20, it did, in fact, move from -12 to +14, or virtually the same amount at either side of zero. Pretty good symmetry. Technicians like symmetry. Here again, no signals from the volume line.

A-D Ratio. The 5-week A-D Ratio also failed to reach either the oversold or overbought levels, rallying from 44.8% on March 23 to 57.6% on May 18. Pretty symmetrical on either side of the mid range (50%).

Groups Bullish. The GB bottomed at 44.5% on April 13, well above the oversold level. However, on June 1, that indicator got up to a very overbought 78.3% and by June 15 had dropped out of overbought territory, thereby signalling a decline.

Summary

So, all three markets have told pretty much the same story. Remember the old adage: "Sell in May and go away". Looks like good advice for this year.

PATRICK TAYLOR IS AN INDEPENDENT TECHNICAL ANALYST

Copyright Canadian Shareowner Magazine Inc. Jul/Aug 2001
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