Participation Climax

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(This article excerpts themes from recent blogs for Decision Point subscribers.)

For a month we have been waiting for a news event to trigger a break up or down out of the narrow, miserable trading range. Thursday brought "positive" news regarding new plans to deal with the European debt crisis. It was the kind of news we refer to in shorthand as pure BS. Or as Macbeth said: "It is a tale told by an idiot, full of sound and fury, signifying nothing."

Specifically, a debt problem cannot be solved until the debtor begins running a budget surplus that allows him to begin retiring the debt. Period. Printing money ain't going to do it, but the geniuses who run the world know better. So the market is constantly on edge, waiting for the next bright idea for ending the crisis with no pain. The news comes, triggers a brief rally (a lot of short-covering). Then reality sets in again. On the chart below we can see the effect these swings between fantasy and reality have had on price.

On Thursday we got a nice market rally, and the Participation Index-UP reached climactic levels. The Participation Index (PI) measures short-term price trends and tracks the percentage of stocks pushing the upper or lower edge of a short-term price trend envelope. The PI has no breadth or volume component -- it is strictly derived from price movement. In this article we will only be addressing Participation-UP.

Climactic activity on the PI is generally in the 60 to 80 range, and climaxes generally signal that the immediate advance is ending and that there will be a period of consolidation or correction -- a pause to refresh, so to speak. There are instances where price just keeps rising after indicators climax, but that kind of price power is normally associated with the beginning of a new bull market. Thursday's climax is more likely a signal that the news-induced advance is nearly over.

s&p 500 participation index six months

Conclusion: The S&P 500 has advanced about 13% since the June low, but it has been a choppy ride because the news suffered from a lack of sustainability. Climaxes of the Participation-UP have been occurring at or near short-term tops, and I think that will prove to be the case this time as well.

Technical analysis is a windsock, not a crystal ball.

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About Carl Swenlin