A Little More Selling Could Be Just What This Market Needs
Nasdaq is approaching an oversold condition, selling pressure is finally picking up, and a dose of bearish sentiment could improve the outlook.
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Note: I plan to take tomorrow off as my grandkids are coming to town. Should the market have a wild day where I see something urgent, I will send out a note on Friday morning. Otherwise, my regular schedule returns Monday morning.
Earlier this week, I said if the market can rally early in the week, I think it pulls back late in the week because the Overbought/Oversold Oscillator will be overbought midweek. We even looked at the oscillators two days ago.
The NYSE’s Oscillator got over the zero line on Tuesday but has now fallen back. The math says we should pull back to head back to a short-term oversold condition. This typically means the ‘others’ should pull back because this is based on the breadth of the market.
Nasdaq however, has not even managed to get up and over the zero line before heading south again. If we look at the math behind this indicator, we can see that by Tuesday/Wednesday next week it gets back to a good oversold condition. Can a rally start before that? Sure, but it would be better if it waited at least a few more days. It would be better because if Nasdaq doesn’t rally soon, it is possible we actually get some bearishness to creep in.
As a reminder, we look for the point in time that this ten-day moving average is dropping a string of red numbers to call it oversold, which is why I note midweek next week.
Nasdaq also saw a huge increase in stocks making new lows. They now number nearly 700 issues. That will need to contract if Nasdaq is going to have a rally. And then there is the Nasdaq McClellan Summation Index, which we discussed earlier this week. It has been heading down and made a lower low on Wednesday. However, it now needs a net differential of +9.1 billion shares (that’s up minus down volume) to halt the decline. At +10 billion shares, I consider it very oversold.
We looked at the ten-day moving average of the put/call ratio yesterday, and it remains subdued, but it did tick up a smidge on Wednesday. That is why I say if we can get some more downside, we might actually see a little panic.
I also say that because the QQQs traded 50 million shares today. These days it is hard to get Nasdaq to trade much more than 50 million shares, but that is a start. And it says folks finally did some selling.
With the SOX now working on six straight days of losses, it’s hard to imagine it won’t have some sort of rally, especially since I did say I thought the SOX would come down to that line I drew around 11,500 on the SOX, and it got to just under 11,700 on Wednesday. A bounce day and then back down would probably help push sentiment toward the bearish side.
I still think the market is complacent, but we saw a minor shift this week with the SOX going down. And I still think the market will favor the ‘others’ over the coming weeks, as it did on Wednesday.
