As I pointed out yesterday (see Brexit: LTCM or Lehman?), my Trifecta Bottom Spotting Model, which has shown an uncanny record of spotting short-term market bottoms. This model flashed an “exacta” buy signal as of Friday’s close and it has now flashed a “trifecta” signal based on Monday’s close.
The model is based on the following three components. An exacta signal occurs if two of the components are triggered within a week of each other and a trifecta signal occurs if all three are triggered:
- VIX term structure is inverted: When the ratio of 1-month VIX (VIX) and 3-month VIX is above one, it indicates a high level of market fear.
- TRIN above 2: When TRIN is over 2, it is an indication of indiscriminate forced selling by either risk managers or margin clerks – and often marks a capitulation bottom.
- Intermediate term overbought/oversold: When the intermediate term OBOS is below 0.5, the stock market is oversold and stretched to the downside.
The US equity market is setting up for a short-term face ripper of a rally very soon.
Other short-term breadth indicators are also showing oversold conditions that are usually followed by a market bounce. This chart of the % of stocks above their 10 day moving average from IndexIndicators is in oversold territory, though readings could go slightly lower if the market panic were to continue.