In 2013, the market always jumped the gun on rallying before we got maximum oversold. It seems in another example of 2014 is not 2013. We seemingly go down before we get maximum overbought.
There are several reasons to look for a rally in the next one-to-three trading days before we head back down. But I fear that with the weekend looming and the Crimean referendum on Sunday there will be very few folks willing to place a big bet on a Friday.
So, why a rally? The TRIN on the NYSE jumped to 2.5. We haven't seen a reading that high since we had 2.8 on Feb. 3d, the day before we made the early February low. And then there is the fact that the put/call ratio closed at 104%, its first triple-digit reading since the low on Oct. 9. Finally, the number of stocks making new lows on the NYSE actually contracted by a small amount Thursday. Those are all reasons for a short-term rally. The reasons why I think if we do get a rally there will then be another move down.
Let me point out that the biggest difference between early October and early February is that those readings came when the intermediate-term indicators were getting oversold, not when they are getting overbought. That is the reason I say the rally -- if we were to get one -- would be short-lived.
After all, the McClellan Summation Index has turned down, now on both the NYSE and Nasdaq. In addition, the 30-day moving average of the advance/decline line is overbought. Circled on the chart below you can see where this indicator was in both October and February. It doesn't take much of a chart reader to see that today's reading looks nothing like either of those. In fact, beginning late next week this moving average begins dropping that long string of positive breadth readings from early February, so it really ought to go down.
The new lows might have contracted by a smidge on the NYSE, but over on Nasdaq they nearly doubled from Tuesday. Here we see there were 34 new lows on Nasdaq, which is still about 50% of the number of new lows we saw in early February near the market lows, but I would remind you that we see Nasdaq is just over 5% from the same lows it was at in early February. So the question remains, if Nasdaq fell to 4,000, where it was in early February, do you think we would have more than 80 new lows?
Finally, I continue to have that snapshot of the July/August time frame in my head. The indicators are similar in terms of momentum and breadth as well as sentiment. And the pattern of the chart looks quite similar as well. At some point the commonality between the two time frames will diverge -- because they always do -- but for now that still looks like the pattern that fits the best.