Short-Term Oversold, But Will There Be a Bounce?
The Market
We are short-term oversold using my own Overbought/Oversold Oscillator. Is it one of those great oversold conditions? It isn’t, although, in the year 2024, we haven’t had a great oversold condition since mid-April, when we got short-term and intermediate-term oversold at the same time sentiment was really bearish. Before you wonder, wasn’t early August a good oversold condition? Yes, it was good but not as good as April in my view. It was more about a quick panic than a developing one.
The chart shows the Oscillator at almost the same level it was in April.
The math behind the chart is not nearly as compelling. In April, we had had several days of big selling heading into that low so we were set to drop a long string of big red numbers. As a reminder, this Oscillator is based on breadth. The ten-day moving average of the net of the advance/decline line, so we look back ten days to see what numbers we are dropping. When we are dropping a long string of big red numbers, that’s a good oversold condition.
Here we see we’ve got three red numbers in a row, two of them are a decent size. That means it’s an oversold condition, not a great one. But more so, look at what we are dropping off the 30-day moving average (intermediate-term Oscillator). There is not a lot of red to be dropped there, meaning it is not that oversold.
Take a look at the 30-day moving average’s chart. It is where it was (oversold) heading into July. You may recall in mid-June I saw that setting up and called for a rally in the others in July. It turned out to be short-lived but it was a doozy.
We can also see the oversold condition in April. But both those times, the math was dropping big red numbers. As you can see, this time, not so much. It might ‘rally’ but it’s at best a coin toss.
The Nasdaq Momentum Indicator (short-term, not intermediate-term) is still showing, using that method (price) that Nasdaq gets oversold later this week (we looked at that in depth Thursday evening).
The ‘what if’ for the McClellan Summation Index continues to sit at +3000 (what it would take to halt the decline, advancers minus decliners on the NYSE). A good oversold reading there is +4000 or greater. So that too is at a moderate oversold reading. It has been at or around +3000 for a week now.
The Hi-Lo Indicator is now at .51, that is not showing an oversold condition either (this is an intermediate-term indicator). In early August it got to .22. In April it got under .19 (a very good oversold condition). Either way, you can see how the readings that started above .40 weren’t great, they were choppy at best (since September). The chart is below.
And then there is sentiment. Friday’s put/call ratio finally topped 1.0 and chimed in at a very respectable 1.12 (bullish). This is the highest reading since early September. Look how much it has helped the ten-day moving average, which is now at .95. Readings up in that 1.05 area are bullish. See April and August.
I generally do not like to rationalize an indicator, but one reason the total put/call ratio was so high on Friday is because the put/call ratio for the VIX alone was 2.32, a reading so high we haven’t seen it that high since just prior to the 2020 election.
Last week the VIX put/call ratio was over 1.0 for four of the five days. That’s unusual considering the market wasn’t collapsing. Be that as it may, I like the 21 dma for this indicator and you can see that this is now the highest it has been since early 2022.
I am certain you are confused so let me give it a try to explain this. Typically VIX options buyers are professionals so I take this to mean that they are loading up on VIX puts because they believe that post-election we will see volatility come down. Typically we want to be on the same side as the pros. That big spike to 1.7 you see on the chart was just prior to the 2020 election. Once this peaks and rolls over, it tends to be bullish for stocks. It’s hard to say when it will peak, but it is on my watch list.
Let me finish up by asking once again that we watch the 215 level on IWM. The support held (I kept highlighting it) in early October and now as we approach it again, we have an uptrend line that comes in around there.
The bottom line is I would love to tell you the market has a great setup post-election, but unless sentiment gets significantly more bearish, all I see is a short-term oversold condition right now.
New Ideas
About a month ago I highlighted XBI as a positive chart. It had one good day, maybe two and then died, rendering it a big fat nothing. I still like it. What I can’t understand, though, is why every other group that is interest rate sensitive has collapsed and this one hasn’t. I don’t want to see it trade under 95 in a meaningful way.
Today’s Indicator
The Hi-Lo Indicator is discussed above.
Q&A/Reader’s Feedback
Is OIH oversold? Sure. But does it look buyable? Not yet to me. If you were dying to bottom fish then you’d use 270-ish as a stop. O
One chart I like to watch for energy is the ratio of OIH to XLE. I view OIH as the high beta in this group so if folks are buying OIH relative to XLE they are bullish and therefore it ‘s a positive sign for the group. The chart is in a downtrend. Should it start to turn up from here then I would say we are finally starting to see the some sign that at least there is a trade in it.
I was asked to update my view on Amgen (AMGN) . A few months ago I said I would be a buyer around 310 and it has since come down and held that zone twice so I feel confident that as long as the stock holds this 310 area the stock is okay.
I have tried to warm up to Target (TGT) over the last six months and aside from that August low the stock is frustrating. I would say as long as it stays over 145 I give it the benefit of the doubt.
One thing I would like you to keep in mind as we enter the holiday season. Retailers often do well into Thanksgiving but they tend to peak right around then, especially if they have rallied in November.
