What Will It Take for Us to Get Really Oversold?
As we work our way through this chop-fest, the indicators bear watching.
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Let’s face it, the last 4-6 weeks in the market have been a chop-fest. We’ve had a good few days here or there but mostly as I noted yesterday, the QQQs haven’t gone anywhere in four months. Neither have the small caps.
The mid-caps broke out and gave it right back. The beloved semis are right where they were in March.
Software (IGV), after doing nothing all year, did finally break out in October, and, for now, has held the breakout.
The Industrials (XLI), have been terrific since August, but they have begun to falter in the last two weeks.
So, what might it take to get the market to such a good oversold condition that we can get a rally that has some legs, a rally that starts with such bearish sentiment that, combined with an oversold condition, leads to a rally that lasts weeks or months, not a few days. You know, like April.
I would say we would start with the 30-day moving average of the advance/decline line. It hasn’t had what I would term a good oversold condition since June. You might recall in June I turned bullish on the 493 because the setup was there: a good oversold condition and sentiment was leaning sour. But you know what? Even that rally only lasted a few weeks before it, too, gave it back.
My estimation is that this indicator won’t have a good oversold condition until after the election but in the next two trading days, this will drop some big positive breadth numbers (quadruple digits), so unless we rally hard in the next two days, this indicator ought to fall more. If we replace those positive breadth readings with negative ones, this falls more. The more it falls, the more oversold it gets.
The shorter-term overbought/oversold oscillator should also fall on Friday (it drops a big positive number). If we can get a few more red breadth days the shorter term should be back to an oversold condition next week.
Look at the VIX. If it was a stock chart you’d say, I want to buy it because it looks like it wants to rally. If the market can go down in the next few days, the VIX is set for a pop; maybe it even gets jumpy.
It’s not that sentiment is terribly sour (it isn’t), but the AAII folks did pull in their horns this week, and the bulls are now at 37%. Imagine how fast they would turn bearish if we got a little more downside in the market.
The reality is that each time we have gotten close to getting a good setup this year, the market rallies before the setup gets good. Then the rallies have been short-lived. Only the S&P has managed a grind upward. But hey, a girl can hope because this chop-fest isn’t making anyone any money.
