By: Jeff Cooper
Hit and Run Morning Stock Report: 09/08/2022
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Price Lags Momentum
“Whatever happens in the stock market today has happened before and will happen again.” Jesse Livermore
The McClellan Oscillator (NYMO) was developed by Sherman and Marian McClellan in 1969.
The Oscillator is computed using the Exponential Moving Average of the daily difference of advancing issues from declining issues over 39 trading day and 19 trading day periods.
The NYMO is calculated by subtracting a 39 day exponential moving average from a 19 day exponential moving average.
Following the 1929 peak for the DJIA at 391 on September 3, 12939, it was not until May 5, 1920, eight months and two days later, that NYMO set a low of – 100 and began to bounce.
The DJIA closed that day at 259, then turned up the following session.
Most traders (if they did not know the subsequent story) would exclaim “Ah-ha” that’s the bottom of this SEGMENT of the Bear Market.
They would be wrong. And it would seriously hurt their trading performance.
They don’t know history.
THE DJIA CONTINUED LOWER UNTIL IT BOTTOMED FOR THAT PARTICULAR CYCLE/LEG AT AT 211 ON JUNE 24, 1930.
That was a further decline by the DJIA of more than 18.4% over the next SEVEN weeks AFTER the NYMO low of negative 100.
As you know the NYMO struck its most deeply oversold reading this year recently below -100.
The moral of the story:
A deeply negative NYMO reading does not give the all-clear or tell you to go long (at least not for more than a trade).
Interestingly Thursday, September 1, 2022 was one day short of 8 months --about the same as the 1930 NYMO low following the 1929 peak.
The following slide shows each bottom in NYMO below -100 for the 1929 to 1932 Bear Market marked with a dotted red line.
THE DJIA LOW OCCURRED BETWEEN 3 and 12 weeks later at a significantly lower level.
The MYMO bottoms under -100-- THEN weeks later comes the low for the DJIA.
You may say well you are data mining by picking the 1929-1932 Bear.
No. This same pattern occurred not just during the Great Depression. The pattern has always been.
Think of it likes this: the NYMO is momentum. Upside momentum for a rocket will peak BEFORE the rocket reaches its target.
In a Bear, we’re just dealing with the reverse-- downside rockets or momentum.
Price lags momentum.
NYMO measures breadth momentum for a market trend, upward or downward. Peak price follows peak momentum.
Period.
In sum, the next 7 to 12 weeks should see meaningfully lower lows.