There are four things we watch for when reading MTSD before a major rally takes place:
At the end of a decline we watch to see if
there are two or more days in a row or within a few days in which:
(1) MTSD is over 10 and/or AVS is over 2000,
(2) DOW price change is over 100 points,
(3) Flow falls below 110% and there’s evidence of
(4) Bullish herding in the BoP.
A good example is November 2016 just after the US Presidential elections:
Even if you waited until after all the signals fell into place, the gains would have been significant as the DOW climbed over 9,000 points in about 14 months.
MTSD can also alert to a climax indicating with the end of a trend or the beginning of one.
Massive Selling Climax Before Multi-Year Advance
This is the largest MTSD reading (-2,073) we have in the MT database – that day it happened was within 150 points of a bottom that resulted in a nearly 8+ year market advance. We attribute the large negative number to capitulation/climax of selling pressure.
Large Selling Before Decline
In this example we see large selling (-328) before the market declined 2,326 points in just 5 days:
All market declines of any significance have started with an increase in MT Volatility above the 90% level.
• TIP: If a decline fails to push MTVol above 90%, and there’s little to no bearish herding in the BoP, then the previous rally is likely to resume.
Once MTVol rises above 100%, caution is in order. Sharp declines and large price swings can be expected.
• TIP: If MTVol rises above 110% and stays there for two days or more, the chances are a major decline of 5% or more is either underway or about to begin in earnest.
If MTVol reaches 150% or more look for signals that may indicate an end to the decline such as a decrease in the Pipeline and Flow, a decrease in MTSD negative index readings and the dissipation of bearish herding in the BoP.
• TIP: Caution is still in order but typically any MTVol reading above 150% would alert you to a potential buying opportunity to be presented soon.
Pipeline and Flow
As stated above, the Pipeline & Flow gives us a heads-up to potential increases or decreases in MT Volatility within days of it happening.
But there’s a subtle ‘tell’ or divergence when reading the Flow that may help you time an entry.
If there’s a decline in prices and the DOW and other major indexes are making new lows watch the Flow. If the market makes another new low, watch to see if the Flow is INCREASING in value or DECREASING?
In the example above, the DOW made a new low, but the Flow was lower (198%) than the previous reading (222%) … in other words, the Flow was higher but prices are lower (a divergence) setting up a potential long trade.
The DOW rallied 1,358 points in the six days that followed.
SWING HIGH/LOWS USING FLOW and 3rd Column Pipeline
We analyzed the peak ‘high’ and ‘lows’ of the Flow to see if they coincided with major market swings and found something interesting.
From February 5th to Friday’s close we identified the Flow high and low and highlighted them with a red rectangle. To the right are the identification of the highs/lows and it appears that the Flow HIGH and LOW also coincided very closely with the actual SWING HIGHS and LOWS in the DOW:
Of course, we were only able to determine the Flow HIGH or LOW in hindsight. But we did come up with a ‘tell’ of when the Flow could be hitting a new high or new low. If you look on the graphic above, you’ll see we have a yellow oval on the third column of each HIGH or LOW.
SWING LOW/Flow HIGH
What we discovered was that at a Flow HIGH that 3rd column reading was, on average, about 20-50 points higher than the Flow which coincided with a SWING LOW in the market.
So for example on 2/5/18 the 3rd column of the Pipeline was 274% and the Flow was 222%. The 3rd column was 52 percentage points higher than the Flow (note that the bearish BoP was ‘full’):
RESULTS: The DOW advanced 873 points in the 9 days that followed.
On 3/2/18 the 3rd Pipeline column was 132% and the flow was 114% – a difference of only 18 percentage points. However, we noted that there was also some bullish herding in the BoP that day:
RESULTS: The DOW advanced 776 points in the 6 days that followed.
On 3/23/18 the 3rd Pipeline column was 226% and the Flow was 185% – a difference of 41 percentage points: (note that the bearish BoP was almost ‘full’):
RESULTS: The DOW advanced 984 points in the 8 days that followed.
At the SWING HIGH/Flow LOW
We see percentage differences to be smaller, but we also see the 3rd column percentage too be in the 50%-65% range or lower as well.
On 2/16/18 we identified the Flow at 68% and the 3rd column was at 49% – a difference of 19 percentage points AND the 3rd column number was below 50% (note the lack of a ‘1st column, recency bullish herding on the BoP):
RESULTS: The DOW declined 610 points in the 9 days that followed.
On 3/9/18 Flow was at 68% and the 3rd column was at 54% – a difference of 14 percentage points AND the 3rd column was 54%. (note the gap’s in the bullish herding):
RESULTS: The DOW declined 1810 points in the 10 days that followed.
On 4/18/18 Flow was 66% – the Flow the lowest level in over a year when it was at 64% in Feb 15, 2017 – and the 3rd column was 64% – a difference of just 2 percentage points, but as mentioned it was the lowest level in over a year:
RESULTS: The DOW declined 702 points in 6 trading days.