The Question Is, Can the Transports Break Out?
Let's look at the indicators to see where sentiment and the oscillators stand. And then see what the Transports could have in store.
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Well IWM has managed to rally without TLT. Yes, I know it was a bank holiday on Monday, but let’s give the stock traders some credit for opening TLT down and closing it green on the day. I think I need a big fat Sharpie for this line, though.
Despite the green close, the Daily Sentiment Index (DSI) dropped to 28 for bonds so I remain hopeful that it will rally back over that line.
So if bonds rally, will IWM get itself up and over this downtrend line resistance? There is also resistance from the mid-September high. But did you notice that once the small caps rallied, the bullish sentiment tipped over the line to too bullish?
Fear and Greed slipped into Extreme Greed on Monday, something it only toyed with last week. You can see it in the equity put/call ratio which fell to its lowest level of the year after Friday’s rally.
But the place I see it most is the Daily Sentiment Index, as the S&P is now at 84. Nasdaq is only at 81, and the VIX finally slipped under 15 to 13. As a reminder, the DSI is on a scale from zero to one hundred. Readings over 85 or under 15 are yellow flags. Readings over 90 or in the single digits are big red flags and actionable.
Keep that in mind as we look at the Overbought/Oversold Oscillator. Before you blink your eyes to clear them, yes, it is still under the zero line. This is based on breadth, and recall until last Friday, breadth was dogging it for the last month. The math behind the Oscillator says there are still a few days left of this oversold condition, as we are set to drop four red breadth days out of the next five trading days.
That means I expect you will see this indicator shoot up in the next few days as long as the market does not fall apart in that time.
The number of stocks making new highs has finally increased but not by enough to fuss over. We’re still nearly two hundred new highs short of the reading in September.
I have one last chart to show you. It’s the Transports. Did you notice no one even talks about them anymore? But once again, they are on the verge of breaking out. Can you imagine if they do so this week? Can you imagine the level of excitement and bullishness we’ll see? The DSI will surely get to the upper 80s, maybe even 90. And the VIX might be single digits.
If the market can rally a few more days and get back to an overbought condition and the DSI readings can get extreme—the put/call ratio is already there—then we’d have too much bullishness and an overbought market at the same time.
