The Machine has turned net Bullish, meaning a majority but not all of my indicators are bullish. There are several components I look at that measure daily, monthly and quarterly trends in the market. Obviously, the daily trends turn before the monthly and quarterly ones do, so there is some lag off the bottom before the iBCM turns wholly bullish, which is of course what I like the best.

Currently 2/3 of my indicators are bullish and my overbought indicator is in neutral territory. I am jumping the gun–usually I like an indicator to stay bullish for two - three days in a row, to prove it is valid. Today an indicator turned green tipping the machine from net bearish to net positive.*

Take a look at the daily buying and selling:

The s&p has been color coded to be green or red depending on if the index moved up or down on greater than average volume. A white candle indicates less than average (20 period) volume.

The green indicator is the number of stocks in my universe meeting my heavy buying criteria, and the red, heavy selling.

Click the chart above and examine the month of June. See how generally the red bars eclipsed the green bars in size? That’s literally more selling than buying, thus the index went lower.

If you look at the last 10 days, you can see that the green bars are bigger than the red bars, and the market has gone up over that period. On 7/3, we closed at 1263, the same as today. Despite the zero % change, there has been 25% MORE buying than selling over that period. This is a market under accumulation.

Here’s another view. The ratio of buying to selling. Also pretty sensual. This ratio has one flaw–if there are 500 buys and 500 sells, the ratio will be one, indicating nothing, when in reality that would be a highly odd simultaneous strong buy / strong sell. FWIW I’ve never seen anything like that, but it wouldn’t be recognized on this chart. That’s why I look at both readings, to understand the size and relative strength of the readings.

Here’s a longer term view of the ratio, with some commentary:

Just like the ebb and flow of a gay mountain stream, it seems like we get pockets of buying alternating the selling, or vice versa, if you like. April - May had a buy ratio eclipsing selling, while the boxed June area shows selling overwhelming buying.

My Guess:

I say “guess” because the measurement and assessment of “clusters” is sort of subjective. I think the recent bar cluster is akin to January’s bounce where we chopped around higherish (ie stopped going lower), but not nearly as strong as March’s bounce, which sustained a near 2 month rally.

None of the recent readings have been as strong as the readings around March, maybe the recent buying is good enough for a 1 month rally. That would bring us to the beginning of September, just in time to take profits, sell before the big boys come back, tax-loss, or whatever other 100 reasons you can think of to sell paper in September. Sounds awful convenient.

How about my overbought indicator?

Look at the green, middle indicator. The blue moving average is heading up. If you look back, historically this has accurately timed a corresponding upswing in the market. If you look at the green line itself, it is approaching overbought territory, but isn’t there yet. That should cause a small pullback, which should be bought. Someone sharp like Shed may observe you can use the 10 MA of the green line as a signal line…correct.

Lining up the bottom indicator’s spikes with the s&p shows how beautifully fading an extreme sell reading works. It looks like we had a series of extreme sell readings in July. I would look to sell short when the MA finished it’s trip south. I really like the MAs for smoothing out the noise because what I want the the trend of the index, not necessarily the ability to top and bottom tick them.

In conclusion:

I see a pattern of buying outweighing selling similar to patterns that preceded and occurred during the rallies of January and March. I see my oversold indicator rolling over, and my overbought indicator headed higher.

We have a lot of critical earnings out of the way, and oil is being mustache-punched. Finally, we have a negative event being construed positively (MER’s capital raise, compared to Uncle Ben’s bailout of BSC (March rally spark), Midnight Ben rate cut (Jan rally spark).

Based on this evidence, I conclude the near term trend is higher, not lower.

I would look for support along the 20 day average and resistance at the 200 day, which is an identical pattern to the last two rallies.

*If the indicator flips, the Machine will be net Bearish, which would make me reconsider my conclusions. In both January and March, this indicator stayed bullish after turning.