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Are We Oversold Enough To Bounce? at Trader’s Narrative





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Wednesday’s market performance took us down to a seldom seen place: only 10% of S&P 500 Index components closed above their 10 day moving average.

percentage stocks SPX 10 day moving average june 2008
Chart from indexindicators.com

That is oversold but according to Lowry’s research, when the market reaches below 10% for this indicator, we have a setup for a powerful snap back rally that most of the time transforms into a full blown bull market rally.

The good news is that the S&P 500 Index (SPX) is approximately 60 points above its March levels here while it has pushed the percentage of stocks above their short term average to these low numbers. The bad news is that technically, we didn’t go below 10% but actually reached 10.2% and recovered.

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11 Responses to “Are We Oversold Enough To Bounce?”  

  1. 1 Bruce

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    How does this sit though with expectations of the Dow reaching March lows of 11,800?…. Maybe another leg down yet would be more likely???

    Bruce

  2. 2 Jack

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    That chart and its graphics looks eerily similar to the charts over at indexindicators.com.

    I’m wondering if this is from specific software and you two have the same chart provider. I’d hate to think you were snagging someone else’s charts without attribution, especially given your own copyright policy, and his.

    Cheers

  3. 3 Vin

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    This is my first post so let me start by saying that this is THE best financial blog, your data and analysis of data is excellent, very objective, relevant and right on the money.. Bravo, please keep up the great work.

    What is your take on 10.2% vs. the 10%? I say round it down and call it 10% or do you see a retest and breaking of 10% before we move up. Your insight on this will be greatly appreciated!!

    Personally, I’ve put all the money back into the market expecting a rally.

  4. 4 Babak

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    Bruce, definitely possible although to be honest I didn’t envision a retest. Sentiment certainly seems muddled enough to make it possible.

    Jack, thanks for reminding me - I’ve fixed it (above).

    Vin, thanks for the compliment :-)
    quibbling over a 0.2% isn’t really an edge the important thing is the weight of the indicators is much more important than any one specific measure.

  5. 5 Bruce

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    Cheers…. I would have thought “the market” wouldn’t feel “technically satisfied”, until it had…personally….

  6. 6 Vin

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    Cramer says that we will rally from these levels. His prediction is based on S&P Oscillator.

    http://www.cnbc.com/id/25142167

    Babak, have you ever looked of this oscillator? As I understand, this is proprietary and requires paid subscription, but I was not able to find any such oscillator on the S&P website. What do you think?

  7. 7 Johan

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    This signal should be alive now after fridays weak market. Can anyone confirm?

  8. 8 Babak

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    Vin, Cramer using TA? wow, that’s weird. He always makes fun of it. I’ve never heard of a “Standard & Poor’s Oscillator” and neither has google apparently - apart from the recent mentions from Cramer in the link you provided.

    My hunch would be it is something that he got from Meisler or perhaps because of his limited TA knowledge he is missquoting somthing else. In any case he was horribly wrong as the 13th was actually a short term top! From ~1360 to below ~1320! I think Cramer should stick with wearing diapers and hitting big red buttons.

    Johan, nope, not even really close. I think it was in the teens.

  9. 9 eq

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    That is a liberal interpretation of where to put those little green arrows. There are many oversold points that lead to even more oversold. Ritholtz called a button earlier this week and the market took him out without blinking. Additionally, did you know this also held true in 1987…………right before the crash?? Statistics and technical analysis are a function of fundamentals so they have a self-fulfilling prophesy. But, as fundamentals change, so therefore do technicals. We might get a small bounce within the next two weeks but I wouldn’t be putting granny’s money to work. Are you going to buy banks here? Or oil stocks that are trading at valuations not seen in our lifetime? Anyone who does might consider a new career as Bozo the clown.

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