A data Driven Market Review: A historical study of the ABI signal, which has fired 5 times over the past 7 days, and what the implications are for the market.
We have a number of key market moving events this week, most notably so the Nvidia earnings on Wednesday, so again the tape might be a little erratic but in this report I will share the data I am looking at and what the implications are for the market.
Firstly, regarding the Nvidia earnings, I will write a full write up on specific expectations tomorrow, but the numbers are going to be good as they always are. TSM are one side of the guide, the CAPEX numbers from the mega caps that have already reported are the other side of the guide. Every AI company is describing demand that is massively outstripping supply, and Nvidia will of course be no different. They'll be strong numbers, just as they are every quarter. However, as we have seen many times recently, this may not negate a sell in the market.
In fact, when I went back through the last 7 earnings reports for Nvidia, this was the weekly performance for the week they reported earnings:
\-6.65% (most recent)
\-5.94%
\-2.14%
\+2.92%
\-7.07%
\-0.02%
\-7.73%
A specific announcement with concrete guidance on China would likely lead to a sharp rally but Trump says that the H200 chips were not a topic of conversation last week. The data, then, suggests a possible sell this week on Nvidia, which would likely bring pressure to semiconductors and QQQ generally.
However, as mentioned last week, despite the increasingly bearish macro picture that is developing, made worse at this point by bond yields that continue to surge overnight, the market dynamics are currently leaning towards a pullback before trend continuation higher for now.
Structurally, the weekly structure on the market is bullish, above all the weekly moving averages:
https://preview.redd.it/5eexw99ms22h1.png?width=1400&format=png&auto=webp&s=bd09f925c29a6a75d231305819053bf0749335e5
Even a 4% pullback from here would still only have us retesting the channel breakout and the 9W EMA. As such, there is plenty of room to accommodate a price correction here, without disrupting the wider market trend.
That, at least, is what the market is focusing on now. The possibility of the macro picture biting is there, but at this point the market participants believe that the market mechanics are strong enough to delay any bearish reaction until the picture deteriorates further.
I gave you some levels and commentary on the dynamics last week, which describe the market conditions well:
https://preview.redd.it/qvab4tjns22h1.png?width=1400&format=png&auto=webp&s=9c388c845870e33015b97ec95b6c4357a5e44f82
We remain in this state of balance between 7300 and 7500. Above 7500, and particularly so above 7550, the positive imbalance will develop again which can provide mechanical support for a move higher towards as high as 7800.
The more time we spend below 7500, however, the more chance of a correction towards 7300, and if this level breaks, then the downside momentum will begin to increase towards the key downside levels that are marked.
The first is the yellow liquidity support, which coincides closely with a retest of the channel breakout. it effectively refers to the yellow box shown in the SPX chart above where I was outlining the moving averages.
Below that, we have 7040 on ES which is a retest of previous highs, and below that an (unlikely) return to the range bounding dynamics that we saw at the start of the year.
Above 7043, we remain in a positive breakout with positive momentum.
A retest of this level would actually be a great entry for a move higher, but I do not know if we will see it, if we do see this corrective phase at all.
My bet is that this corrective phase will indeed come, and I will share other indicators that suggest so, but this market has been crazy and the test of the 9d EMA may be enough rest to allow buyers to step in.
After all, you have institutional cash back on the sidelines, as highlighted by this NAAIM data below, which may be ready to step in on weakness.
https://preview.redd.it/uchc0q7ps22h1.png?width=1218&format=png&auto=webp&s=1b452c0a1acaaa5c4f869ff9d95d5c4082b35278
Furthermore, if we look at Goldman's equity sentiment, it's positive, but not yet stretched.
https://preview.redd.it/dxi8sq2rs22h1.png?width=1400&format=png&auto=webp&s=a6032f0a407baecc82090b3305c610f7be7cbfff
It's not inconceivable that buyers step in immediately without the need for a larger drawdown, and our first tell that we may see that happen is the recovery and strength off the 7440 pivot that I gave you last week on ES.
We held it for much of the session on Friday, but lost it into the close. And we have opened below it and continued lower thus far overnight. A recovery to above 7440 would represent a 0.8% increase from the current price.
I have calculated the Spy pivot as 741.3. At the time of writing, that is 0.9% higher from where we currently trade. SO in both cases, it's pretty similar.
If we are trading below this level, the pressure is lower, although as mentioned the market dynamics do not suggest a trend change regardless of the deteriorating macro picture. Above it, however, we can open the door to a move towards 751 on SPY. Below it, the door is open towards 726 in the first instance. Remember, the Nvidia earnings will have a large move associated to it which will be the key.
If we look at the daily chart on US500, we see that since this rally started, we had one close below the 5d EMA, but we closed above the 9d EMA on both the subsequent sessions before continuing the rally higher.
https://preview.redd.it/f4li692ts22h1.png?width=1400&format=png&auto=webp&s=abf5332f9789fe46cf26f610bd2932c1b6219e9f
On Friday, we got a close below the 5d EMA, but unlike the previous instance, this morning we have dropped below the 9d EMA, which if we close below would represent a first change of character to be aware of.
My guess would be, however, that after such a strong period above the 9d EMA, the market will defend the 9d EMA for at least a few sessions, even if it was to then break later.
Another trend signal I am watching is the 5d EMA above the 9d EMA. WE had ac crossover in April to start the rally, and have continued higher ever since, but a cross back below can signal exhaustive momentum. It again, doesn't need to signal a trend change, as we saw we did get some cross belows last year, which led to 2-4% corrections before continuing higher. That is, I suppose pretty much in the realms of what the market is currently expecting in this instance.
https://preview.redd.it/19ie3c0ws22h1.png?width=1400&format=png&auto=webp&s=68cacab261d9996535f9edae62cb3990de08a1fe
So that is what the market prices for now, and the key levels to watch to determine the market dynamics. After a failed macro read last month having ignored the price action for what proved misplaced bias, I will let price action determine the read here.
Above 7500 and particularly so 7550 on ES, we should get comfortable with a period of buy high, sell higher. It is very possible that we can see it, and if the market does consolidate above these levels, we should be willing to layer on some new exposure, even if we do so with tighter stops.
For now, though, I am comfortable with my current 60% exposure with 40% cash, as I believe it positions me fairly well for both possible outcomes, and a pullback would then allow me to increase that exposure for another leg higher.
Whilst the market dynamics currently price a moderate pullback but no major trend change, there are a few reliable indicators I am looking at which suggest that we should maybe expect a little more, although the indicators I'm referring to are not particularly precise in forecasting a timeline. We can often grind higher or consolidate even once the indicators are firing, but they do always eventually come to pass, in what I believe from my backtests to be a record of no false positives. Again, I'm not going to bias the opinion, and instead will let price action speak for me, having positioned such that I am fairly flexible in both eventualities, but my personal lean is lower, even if not a trend change.
The main signal I am referring to here is the ABI signal. Those who followed me in September last year will be familiar perhaps with this signal as I did write about it at that time in the middle of February when it was firing quite consistently.
ABI stands for The Absolute Breadth Index. We see clearly by looking at the advance decline line that breadth has been pretty weak of late:
The market's gone higher, but thats a pretty significant divergence in participation.
https://preview.redd.it/a5izt28ys22h1.png?width=838&format=png&auto=webp&s=2b968aecd0752878b2f831816bd42ec9a9a531a2
I wrote about it last week how the narrow participation is in part explainable by the simple fact of how well the AI trade has been working after the really strong earnings recently across the board for the sector. Memory bottlenecks have been pronounced and semis have been ripping so people have flocked there, creating narrow breadth.
That to me, represents a risk as I believe that a lot of those investors are effectively tourists, who don't properly understand or have conviction in the narratives of those stocks. They are chasing the momentum and when the momentum stops, there could be more significant drawdowns there.
Nonetheless, back to the ABI: The absolute breadth index is another indication of breadth developed by Norman Fosback. It is calculated by taking the absolute value of the number of advancing issues minus the number of declining issues. Whilst there are a few versions of calculation, the version that Fosback most promoted was the absolute value of the advances minus declines on the NYSE for the last 5 days, divided by the total number of NYSE stocks. We can then derive a percentage from this.
Fosback argued that Readings above 40% are very bullish and readings below 15% are bearish.
The theory behind the Index is that when the absolute difference between the number of advancing and declining stocks is high, you are more likely to be near a market bottom than a top. On the other hand, a low Absolute Breadth Index reading is more likely to signify potential buying exhaustion.
The threshold to think about according to Fosback is 15% but my personal research uses 14% so slightly stricter.
Historically, when you get a cluster of Absolute Breadth index readings below 14% typically that has been a pretty reliable indicator of potential volatility expansion, that is to say a VIX spike.The more readings we get below 14, the stronger the signal becomes, but unfortunately timing is a little hard to put a finger on. The guide is around 30 days, but again, I admit that the timing is hard to pinpoint.
In the near term, we can see the market continue to grind higher even once the signal fired, so it's not an immediate sell signal at all, just as, for instance, the market getting overbought isn't an immediate sell signal.
For example, when I covered this last year, and I went through my previous reports to find the one on the 18th of September, the ABI signal had fired around 10 times already. The market continued to grind higher despite the signal, from 6630 to 6760, before we got the strong volatility and pullback that we saw in October and November.
If we see back in march, we had the signal firing from the start of February in a strong cluster, which get stronger as we approached the end of February. The yellow readings are readings below 14, the orange readings are very low, below 12.
https://preview.redd.it/p83mi7d1t22h1.png?width=1226&format=png&auto=webp&s=010d8a891f05b45432000207fff4e4de1e75ff4d
The time between the initial firing and the pullback was 45 days in this case.
The historic data going back through time of this indicator is also extremely compelling. .
2019 into 2020.
https://preview.redd.it/jphpbz32t22h1.png?width=750&format=png&auto=webp&s=7e10effc9d531f1a73e8eee299f0239bea37e706
*My comments:* We see a few instance she elf where the ABI falling below 14 led to a rally in VIx.
October 2018:
https://preview.redd.it/igc5edz2t22h1.png?width=754&format=png&auto=webp&s=d1b5f15cbfaafee122820b48a3f6868f05f98580
Again in 2017-2018:
2017 into 2018:
https://preview.redd.it/gbpbres3t22h1.png?width=724&format=png&auto=webp&s=c18291d90f5a433bd7362df54621909fba6c27d7
This one took longer to play out at the end of 2017 but led to a massive vol spike.
Then 2025:
4 signals before the sell off:
https://preview.redd.it/35tugwk4t22h1.png?width=1142&format=png&auto=webp&s=92ee48fe7370fc5e1333974a5682943fcff5214f
Going back to 2017, the research is quite compelling in that there has been no false positives. Every time the AbI has triggered below 14, we have had some vol spike to some extent, the minimum being 59% before it faded back. Sometimes it is pretty immediate, sometimes it takes weeks, or even a couple of months.
AS mentioned, it's not a timing tool, but it is a red flag to be aware of. Hopefully an opportunity will come from this, maybe a pullback to retest the EMAs before continuation higher. There's no reason why the market pricing no significant trend change and the Abi signal cannot work together. Last year, we had the sell off through October after the Abi firing in September, before a rally back to ATH.
Currently, by the way, we have had 5 triggers in the last 6 days.
What';s interesting, is that if you look at the rally last year from April through to October before it ran out of steam, it wasn't until September when the ABI signal started firing.
In today's case, we haven't had the Abi signal fire the entire rally until 6 days ago. So the argument could be that we are where we were last September. The sell we saw in October in high beta would make sense given how many tourists I see in the memory and semiconductor stocks. But I am not sure. As mentioned, it's not a good timing tool.
The most immediate term trend will be determined by the pivot that I outlined to you. but this is something to maybe keep in mind, and may be a reason to still exercise caution on this market.
Based on the Abi, and the history of NVDA earnings week reactions, my lean is bearish on the market, but I am better positioned this time around for the alternative outcome that I am wrong and we continue to grind higher off the 9d EMA.
Bond yields are higher, and breaking out:
https://preview.redd.it/sf233nn5t22h1.png?width=1400&format=png&auto=webp&s=61131238f9ac8f9c22428459a566a982d6a3b504
https://preview.redd.it/f3lg5ff6t22h1.png?width=1400&format=png&auto=webp&s=41650bef5bc979f850e867835027d6bb97735f33
The long end is extremely stretched, above previous TACO levels. We know the bond market is Trump's weakness. Will we see some concessions? Possibly. We have to see.
The ABI signal is a concern. The history of NVDA earnings is a concern. But for now, the market remains in a balanced zone, and price corrections are not expected to disrupt the trend higher.
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