Market's Rare Technical Formation
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CBSMarketwatch reports: A rare technical formation occurred in the stock market in June that, far more often than not in the past, has heralded higher stock prices over the subsequent six months.

The particular formation is referred to as a "Nine To One Up Day." It refers to 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 "Nine To One Up Day" occurs when this ratio is 90% or higher. When such a huge imbalance of up volume over down volume is a significant sign of positive momentum.

Every bull market in history, and many good intermediate advances, have been launched with a buying stamped that included one or more 9-to-1 up days.

The relevance of all this to today's market is that there two 9-to-1 up days in June, one on June 15 and the second one June 29. This second 9-to-1 up day adds greatly to the bullish significance of the first. That's because a single 9-to-1 up day, by itself, has not always been a bullish event. Perhaps its biggest false signal came on March 16, 2000, at more or less the exact top of the market before the Internet bubble burst.

A single 9-to-1 up day can issue false signals and that, therefore, it would be better to focus on occasions in which two such days occur relatively close to each other and when also there is no day between these two days of big up volume in which in which there is a 9-to-1 down day (a day in which down volume is 90% of the combined volume of rising and falling issues).

The "double 9-to-1 signals" are relatively rare, occurring once every two to three years, on average, since 1960, and particularly bullish. Over the six months and 12 months following each double 9-to-1 day between 1960 and 1985, the stock market was higher, sometimes significantly so.

Ned Davis Research has calculated the returns for this indicator over a longer period, from 1950-2004. On average over the quarter following a double 9-to-1 up day, the S&P 500 is 7% higher, and over the six months following such days, the S&P 500 rises 12.6% on average.