Two indicators arguing for "buy the dip"

Key points

• The percentage of S&P 1500 stocks with a 2-day RSI below 30% spiked during the recent decline
• The NASDAQ McClellan Oscillator plunged as the Nasdaq 100 declined
• When these signals have occurred in the past while the underlying index was above a long-term moving average, forward results tended to be above-average

A high % of S&P 1500 Index stocks are showing a low RSI

The chart below highlights previous dates when:

• The % of S&P 1500 Index stocks with a 2-day RSI below 30% crossed above 70%
• And the S&P 500 Index was above its 150-day moving average
• For the first time in three months

The most recent signal occurred on 2024-08-05.

In the chart above, we see that these signals are typically useful in identifying buying opportunities within in an existing uptrend. However, eventually, every uptrend comes to an end, and the last signal (or two) at the end of a trend tends to be followed by declines. So some vigilance in terms of risk management is necessary if trading based on these signals. 

The table below displays subsequent S&P 500 performance.

The table below summarizes the S&P 500 performance following previous signals.

Each instance is accompanied by other factors that can affect stock prices. So, it is not accurate to infer from the results above that there is, say, a 79% probability of higher prices six months from now. This signal should not be considered a "buy signal" but merely as a solid weight of the evidence item that falls on the favorable side of the ledger.

The Nasdaq McClellan Oscillator plunges

The chart below highlights previous dates when:

• The Nasdaq McClellan Oscillator crossed below -75
• And the Nasdaq 100 Index was above its 200-day moving average
• For the first time in three months

The most recent signal occurred on 2024-08-05.

The table below displays subsequent Nasdaq 100 Index performance.

The table below summarizes Nasdaq 100 performance following previous signals.

Win Rates are significantly strong across all timeframes, and results have been excellent over three to six months following a signal. However, as with an indicator signal, there are meaningful exceptions to the rule (following the 2021-12-01 signal, NDX lost -11.6% three months later and -18.8% six months later). So, this indicator should not be relied on as a standalone trading model.

What the research tells us…

Pullbacks in an uptrend are normal. The problem is that in real-time, it is often difficult to determine if a given pullback is "normal" or "the start of something bigger." It is unhelpful that every pullback - normal or otherwise - is accompanied by a cacophony of gloom, doom, and dire predictions in the financial press and social media. The purpose of using indicators and models is to help us to ignore the "noise" and focus on the probabilities. With the caveat that the two indicators above are far from perfect in generating signals, they presently suggest that the current pullback is normal and that the historical probabilities favor a rebound in the months ahead.