.<font color=red> Bullish Double 9-to-1 Signal
A new pattern formed on tuesday tilting the indicators a bit more towards the bulls
"... there's more reason for the bulls to cheer than the magnitude of the day's point gain. Tuesday's action also was strong enough to trigger a bullish technical event known as a "Double Nine-To-One" signal.
This indicator is based on the volume of all NYSE-listed stocks that go up on a given day, expressed as a percentage of the total volume of all stocks that rose or fell on that day. On a day when rising stocks' volume is the same as declining stocks' volume, for example, this ratio would be exactly 50%.
A single "Nine-To-One Up Day" occurs when this ratio is 90% or higher on a given day. According to Martin Zweig, who helped to develop this indicator several decades ago, such a huge imbalance of up volume over down volume "is a significant sign of positive momentum. In other words, when daily up volume leads down volume by a ratio of 9-to-1 or more, that tends to be an important signal for stocks." The quotation comes from Zweig's 1986 book, "Winning on Wall Street."
An even more bullish signal, according to Zweig, is when two "Nine to One Up Days" take place within a short period of time -- something he called a "Double Nine-to-One" signal. It is this more bullish signal that got triggered on Tuesday: March 11, one week ago, was a Nine-to-One Up Day, and so was Tuesday, when up volume constituted more than 95% of the combined volume of both rising and falling stocks.
How bullish is a "Double Nine-to-One" signal? One answer is provided by David Aronson, an adjunct professor of finance at Baruch College. Professor Aronson is the author of a book titled, "Evidence-Based Technical Analysis" (Wiley, 2007), in which he discusses how to use the "scientific method and statistical inference" when judging investment strategies.
Aronson, along with the students in a class he teaches at Baruch College, tested the statistical significance of "Double Nine-to-One" signals. Aronson told me that he and his "class used data from the beginning of 1942 through fall of 2006, and we looked at what happens in the stock market in the 60-trading-day period following a double Nine-to-One signal, versus what happens the rest of the time. In those 60-trading-day windows, the S&P 500 index produced an average annualized return of over 22%, on the assumption that an investor entered the market on the close the day after a double Nine-to-One signal was triggered and held until the end of the 60th trading day later."
"In the non-signal periods," Aronson continued, "in contrast, the return averaged 4.5% annualized. The difference between these two average returns is statistically significant."
Aronson told me that these calculations do not include dividends.
Are there are flies in the ointment? Of course. There always are.
One is that "Double Nine-to-One" signals aren't foolproof. Such a signal was triggered last November, for example, and, far from rising at an above-average rate over the subsequent three months, the stock market fell.
Another objection is that it may not be entirely fair to consider March 11 to have been a "Nine-to-One Up Day." That's because NYSE up volume on that day, as a proportion of total volume of both rising and falling issues that day, came to 89.998%.
A technician who rounded percentages to two or fewer decimal points would have concluded that March 11 was a Nine-to-One Up Day. But someone who calculated the ratio out to more decimals would have concluded that March 11 didn't qualify and, if so, then we didn't get a Double Nine-to-One signal this week.
However, Aronson, in an interview Tuesday afternoon, indicated that in his opinion, March 11's volume data came close enough to qualify. Had it been included in the sample studied by him and his class, March 11 would have been considered a "Nine-to-One Up Day."
Finally, a more serious objection is that there have been around a dozen nine-to-one down days over the past couple of months. However, Zweig argued in his book that Nine-To-One Down days do not have as much bearish significance as Nine-to-One Up days have bullish significance.
The bottom line? Tuesday's "Double Nine-to-One" signal may not prove to be as reliable a signal as it has in the past. But the bulls can nevertheless console themselves that the burden of proof has shifted so that it's now the bears poking holes in the bullish argument rather than the other way around.