First let’s talk about where we are.  We fell off the cliff since the beginning of August which put or ZBTr indicator into extreme oversold at 27.7.  In fact that is a rare low reading.

Since August 8th, 2011 we have based at the lows and begun a rally back up and in the process driven our ZBTr up to 57.  This indicator fires when within any ten days we move from below 40 to above 61.5.  Its accuracy is nearly perfect in predicting bull markets (The last firing was March 2009).  So we sit at 57, but that last 4.5% is extremely hard to reach, it has 7 days from this posting to get there.

What does history teach us?

Spinning the clock back to 2008 we will look at three different attempts which I think represent our current fork in the road. 

Failure #1 came as the wheels were coming off in September 2008 and into the beginning of October.  Again our ZBTr ran down to that 27.70 level and we put in a bounce.  Day 3 we were up to 51 failed back down to below 40 which restarted the ZBTr ten day counter, had a nice counter day rally up but yet missed the 61.5 number, prices failed and we made a lower low and another 27.7 reading. 

Failure #2 picks up wither Failure #1 left off.  With a bottom near 700 we put in 5 days of rally, encouraging the bulls which were never able to get the indicator above 61.5 before the clock ran out.  This led to an agonizing down ward slow drift that eventually collapsed into the March 2009 lows.

Success – Finally in March 2009 with a series of oversold ZBTrs we lifted out and had our first successful ZBTr since 1984 and the rest is history.

So it is well worth your time to follow along as we watch the ZBTr over the next 7 trading days for a hint of what is to come, new market highs our a series of lower lows?

-Red

More about the ZBTr:

The following excerpt is from Steven B. Achelis’s book Technical Analysis from A to Z

BREADTH THRUST

Overview

The Breadth Thrust indicator is a market momentum indicator. It was developed by Dr. Martin Zweig. The Breadth Thrust is calculated by dividing a 10-day exponential moving average of the number of advancing issues, by the number of advancing plus declining issues.

Interpretation

A “Breadth Thrust” occurs when, during a 10-day period, the Breadth Thrust indicator rises from below 40% to above 61.5%. A “Thrust” indicates that the stock market has rapidly changed from an oversold condition to one of strength,but has not yet become overbought. According to Dr. Zweig, there have only been fourteen   fifteen Breadth Thrusts since1945. The average gain following these fourteen Thrusts was 24.6% in an average time-frame of eleven months. Dr. Zweig also points out that most bull markets begin with a Breadth Thrust.

Example :

The following chart shows the S&P 500 and the Breadth Thrust indicator.Horizontal lines are drawn on the Breadth Thrust indicator at 40.0% and 61.5%.Remember that a Thrust occurs when the indicator moves from below 40% to above 61.5% during a 10 day period.On December 18, 1984, I wrote the following comment regarding the Breadth Thrust indicator in a software manual:

“At the time this discussion on the Breadth Thrust is being written (12/18/84), the NYSE has gained only 1.6% since the ‘Thrust.’ If the market fails to go higher in the next six to twelve months, it will be the first false signal generated by the Breadth Thrust indicator in 39 years! With historical average gains of almost 25%,we feel the odds are in our favor when we go with the Thrust.”

As shown in the example, the NYSE did in fact go higher in the ensuing months.Twelve months after the Thrust occurred the NYSE was up 21.6%. Twenty-one months after the Thrust occurred, the NYSE was up a whopping 51%. Trust the next thrust…

Calculation

@RedlionTrader

The bears have escaped one of the most bullish signals there is and can certainly breath easier.  As far as being on the outlook for another chance,  we would need to travel to the downside here and then have a thrust back up.   We will have how long lived the weakness from Friday is. For now we will take our Zweig indicator and put it back on the shelf and wait for another setup sometime in the future.

What the heck is a Zweig Breadth Thrust?

As a reminder, this is what the March 9th, 2009 thrust looked like on day 4:

Then once the thrust target was met, how we played out for the next 20 trading days:

The bulk of the gain was in the first 7 trading days it took to meet the thrust, almost  a 10% gain.  Then over the next 20 trading days the markets gained another 8.5%.

Let’s relate that to our current situation and see if we tracked the same where that would put us if we were to mimic the 3/9/09 thrust: Currently we are about 5% up since crossing the oversold line.

By 7/15 we would have completed our thrust and the market would be sitting right at the apex of the right shoulder of the dreaded head and shoulders (the 1130 area).  Then for the next 20 days the market would climb and by 8/12 we would be at new highs and in the 1126 area.

I will save these charts and see how they benchmark over the summer.  Keep watching the Zweig.

What the heck is a Zweig Breadth Thrust?

What the heck is a Zweig Breadth Thrust?

Pretty close there.. better than the last attempt before stalling out.  We still have 7 more trading days to prove it out.

There is a divergence today from Zweig Breadth indicator