Stocks ROC – This Has Only Occurred Six Other Times Since 1983

bearbullChris Ciovacco:  Based on the title containing “only six other times”, you may have questions about small sample sizes; that topic is addressed in detail later in this article.

Weight Of The Evidence

The weight of the evidence in a court of law can refer to:

The whole set of evidence presented on a topic or question, such that the overall weight of the evidence can be said to favor one conclusion or the other.

Momentum From A Different Perspective

In the financial markets, we can always find bullish evidence and we can always find bearish evidence. The weight of the evidence is ultimately what helps form the market’s net aggregate opinion about the value of any asset. If we have ten pieces of bullish evidence, that is better than one piece of bullish evidence.

We recently presented a long-term set-up (or signal) using the S&P 500’s Coppock Curve. Is there any other evidence that aligns with the Coppock Curve analysis? Yes, another method of monitoring bullish and bearish momentum in the stock market recently completed a rare sequence of events.

Rate Of Change: A Very Rare Occurrence

In 2015, the S&P 500’s weekly chart printed something that has only occurred six other times since 1983. The analysis below is an extension of the “rare readings and key reversal” data that was presented on October 2 and October 9. The two rare October events, described in video clips (key reversalCCI exits oversold) said “be open to a bottom and rally in stocks”.

The Rate of Change indicator does exactly what you would expect it to do; it measures the rate of change from one period to the next. Similar to the Coppock Curve, it helps us track bullish and bearish momentum. The chart below shows the rare and extreme set-up that recently occurred in 2015.

This Is A Long-Term Set-Up

The Rate of Change set-up is a long-term set-up, which cannot be emphasized enough. Like the Coppock Curve analysis, this Rate of Change analysis is looking out roughly 10 weeks to 3 years, rather than hours or days.

Study Parameters

Before we move to the “what happened in the stock market historically” segment, it is important to define what this study covers:

  1. Weekly S&P 500 Rate of Change (ROC).
  2. ROC must drop below -8.25% as it did in 2015.
  3. ROC must recapture the zero line as it did in 2015.
  4. ROC must recapture 5% as it did in 2015
  5. Examples in a bull market (in 2015 the S&P, for now, remains in a bull market).

How Rare Is This Set-Up?

After the secular bull market was established in 1982, the S&P 500’s weekly Rate of Change did not drop below -8.25% until 1987. Rate of Change dropped below -8.25% three other times (1990, 1998, and 1999) before the bull market ended in 2000. Therefore, the total number of set-ups in the 1982-2000 bull market came to 4 (see below).

The set-up we are studying involves such an extremely low and rare level of momentum that not one set-up occurred between 2003 and 2007 that fully meets our criteria. Under our approach we would have classified the market’s profile in early 2003 as “bear market rally/new bull market attempt” rather than “an established bull market”. Therefore, the 2003 example shown below near point A falls outside the scope of this analysis. It should be noted after hitting a rare and extreme level in 2003, Rate of Change was still helpful.

Since the S&P 500 flipped back to a bull market profile in March 2009, weekly Rate of Change has only dropped below -8.25% on two other occasions (2010 and 2011). Therefore the total number of set-ups that occurred in the 1982-2000, 2002-2007, and 2009-2015 bull markets is 7, with 2015 being the 7th occurrence.

Why Only Study Examples In A Bull Market?

In calendar year 2015, the S&P 500 remains in a bull market until proven otherwise. As of December 1, 2015, the S&P has not dropped 20%, nor is it trading below its 50-day and 200-day moving averages, meaning the plunge in August looks like a correction in the context of an ongoing bull market. Therefore, if the S&P 500 is currently in a bull market, then it is logical to study similar S&P 500 weekly Rate of Change examples that occurred in an established bull market. More detail on the bear market topic follows the historical charts below.

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