Odds Up for a Quick Rally

 | Sep 26, 2013 | 6:00 AM EDT
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I'll start by saying that I believe the market will rally Thursday -- and here's why.

The Arms Index (TRIN) has been above 1.0 for five trading days in a row. (For some of these, it's barely above that level, but they still count.) I looked back to find that, over the past year, we've only seen the TRIN above 1.0 for a maximum of five consecutive days, and there were seven times when we saw a string of days of four or five days.

In five of those seven cases, the market rallied about 1% the next day. Once it rose just a bit more than 0.5%, and once it chopped for two sessions and then rallied 1%. What's curious about the list of dates is that only one of them led to a multi-week rally. For the most part, the market climbs were brief affairs.

First, in August of last year, the market ended a four-day string with a 0.5% rally, then continued rising for about two more weeks before reversing course to fall again. In the following month, the market ended a five-day streak with a 1% rally that lasted a few days before another decline -- and about the same sequence repeated itself in October. Another streak came in February of 2013, and that ended with a 1% rally, followed by more upside for about another two weeks.

It was this past June when a streak coincided with a market low that was followed by a three-to-six-week rally. In early July was yet another string -- right on the heels of that June reading -- that gave us two days of chop, followed by the July 5 employment report that saw the S&P 500 tack on 17 points. That rally lasted about another week before it faded.

Finally, on Aug. 21 the market rallied about 14 points after a four-day TRIN string above 1.0. Then stocks tanked into the late-August low.

It has been my view that we should see one more rally into the end of the quarter or early October, just to take the market to an intermediate-term overbought condition. In doing this exercise with the TRIN, perhaps I'm searching for statistics that prop up my view -- but that's what I'll be watching for. If you would prefer to find a flaw in this, then go no further than July 2012, when the TRIN went above 1.0 for 10 straight trading days.

Away from all this, note that the number of charts that have developed head-and-shoulders tops is growing by the day. I believe it is only a matter of time before even non-chart folks see them. We already dissected JPMorgan Chase (JPM) Wednesday, and I suspect it won't be long before we hear everyone chattering about Google's (GOOG) head-and-shoulders top as well.

Google (GOOG) -- Daily

I am certain that, as you go through your stock charts, you will see plenty of patterns that look like this. They might get saved, but it probably won't happen before we hear plenty of scary commentary about these formations.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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