13 June 2012 UPDATE: This Great Trough is not done yet, we may well re-test prior lows in the bottom-making process. The breadth- index head-faked and fell below 26% yesterday meaning the countdown timer will be reset. We now await for the index to rise above 26 again and attempt a second strike through 87 within 15 trading days. We then issue the BUY signal.
For a detailed background, mechanics and statistics of this system read The Great Trough Detector Project on our RESEARCH menu.
SHORT BACKGROUND (posted 2 June 2012)
One market breadth metric we like to watch is the 13-week (quarterly) new Hi/Lo Index. It is just new highs for the last 13 weeks divided by new highs + new lows. It can be deployed in a classic “slingshot” timing system whereby a rapid rise within 15 days of the metric from below 26% (severe correction) to above 87% is very good at marking time for “Great Troughs” which are excellent “buy on the dip” opportunities.
Buying on the dips is nice but the reason we watch this metric is that it fails to flag buy signals during protracted bear markets or recessions. The recent sell-off has dragged this index to below 26% now (to a very oversold level since March 2009) and so we are “primed” for a “Great Trough” event within the next few weeks.