Free Falling

Posted by downtowntrader | 10/08/2008 09:10:00 PM | 0 comments »

The markets continue to drop, and the more they drop, the more bullish I am feeling. Worden's T2108 indicator which tracks stocks trading above their 40 day sma is currently at 1.97. This means that only 1.97% of stocks are trading above their 40 day sma's. That is absurdly low, and we have to go back to the 1987 crash to find levels this low. Notice that this indicator making lows that weren't seen during the nasty bear market that followed the Internet Bubble. I don't want to make too much of one indicator, but this has been a reliable indicator for me in terms of warning me that the markets are oversold on an intermediate level. Under 20 is the level I look for and it has been under 20 for the better part of the last month. Under 10% is pretty rare, and it has only been under 5% in 1987 and now. Again, we are at historic lows for this indicator and while it doesn't signal an all clear for buying, I think shorting here is suicidal.

Below is a weekly chart for the T2108 indicator going back to 1986 when it started being tracked. I overlayed a line chart of the SP-500 as well. Notice how rare moves under 10 are and the moves in the SP-500 that generally follow.

It's too early to call a bottom here, but I'm fairly confident we are close to one.

Good Trading,