Slop and Chop Defined Monday's Action
Breadth was poor on Monday, leading to directionless trading. What we really want is a market with bearish sentiment that is also oversold.
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Monday’s market was a total lack of direction. Maybe it’s the post-Olympics letdown. Maybe it's that folks need a break after the volatility of the last few weeks, but whatever it was, Monday’s action was sloppy and choppy and not much else.
Well, statistically, it was something else. Breadth was quite poor, so, that’s now two days where the index movers lifted the indexes but left everything else behind But, there was very little drama in the moves; it was mostly small moves.
The number of stocks making new lows expanded, but even here, it wasn’t noteworthy except that the NYSE saw new lows push up to 73. Last Monday’s peak reading was 221, so we’ll have to watch that. If the S&P tumbles back to those lows, will there be fewer than 221 new lows?
Nasdaq’s new lows hover around 200 but they have been at this level for four days now. The peak reading last week was near 600 so there is a lot more room for a move back down, should we get one, that has fewer new lows.
Keep in mind that poor breadth days are what eventually takes the market back to an oversold condition. The longer the string of negative breadth days the better the oversold condition when we get there.
Right now we’re in the middle of the cycle. We got to an intermediate term overbought condition about two weeks ago, as we headed into August. That means we’re still working that situation off.
I use the 30-day moving average of the advance/decline line as my intermediate-term Oscillator. It is the blue line on this chart and you can see it has barely moved from where it was. It’s not even close to the zero line, let alone below it. My estimation is that we should see it start to head lower in a meaningful way next week. It’s the math.
But until those intermediate term indicators get oversold this is what we can expect. But think of it this way. The longer it takes for the market to rebound, the worse the breadth numbers can get and the worse they get, the more oversold we get.
Or you can look at it like this. The worse it gets, the worse (more bearish) sentiment gets. Recall last week we saw the plunge in the Investors Intelligence bulls and the rise in the AAII bears but in both cases we did not see the other side move much. In other words, the Investors Intelligence bears should lift and the AAII bulls should fall.
And that should happen as the market makes its way toward an oversold condition. A market with bearish sentiment that is oversold is a market I would bet on to rally well. It’s just the journey to get there that is difficult.
