One of my favorite barometers for how the market is doing from an internal strength point of view is the McClellan Summation Index. I tweeted out earlier this month (August 8th) when that Summation Index broke down out of its upward broadening pattern …
One of the things traders learn over time is that trades generally work out much better when the trades are taken in the same trend as the overall market. They also learn that the overall market will move much further and that move will have more strength if the breadth of the overall market is also expanding/trending in the direction of your trade.
The McClellan Summation Index is a cumulative measurement of the advancers versus the decliners so it can help traders keep an eye on the strength/direction of the market. Here is an update of the index as of the close on Friday …
While I think the index is setting up to show a burst of strength in the market sometime next week, I am cautious of how high the market will move on the next bounce higher. Here is a snapshot of the McClellan Summation Index from back in late 2015 as we headed into the vicious down market of January 2016.
You can see that back in late-2015, the McClellan Summation Index was starting to look like it was trending lower. Nothing heads in a straight line forever and the bounce in the Summation Index lasted about 6 green candles (Dec 22nd – Dec 30th) before it began rolling lower.
I’m not saying the market is about to give us a similar push lower like it did in early 2016, but the bounce coming this week should be viewed with caution until it can show us that it is not about to fail after about five or six-days of bouncing.
Cheers … Leaf_West