Trader’s Narrative

While the market has been acting tired this month and the tape looks like it want to head lower, we have some signs that, at least in the very short term, the equity markets are oversold.

For example, take a look at the percentage of stocks above their 10 day moving average. Earlier this week this fell to just 11% which is just a hair’s width shy of the ‘magical’ 10% level:

The medium term breadth measure, percentage of S&P 500 stocks above their 50 day moving average, is not showing any indication of being oversold. As of yesterday about 60% of the 500 component stocks closed above their 50 day moving average.

Since mid April this percentage has been hovering around 90% - signaling an extremely overbought market. But the indexes have been able to move higher in spite of this.

This provides for a potential tell for the health of the market. If we are able to put in a strong bounce (in the short term) here in response to the oversold condition, then there is a higher chance that the market can continue to snake its way higher as it has since March 2009. But if we fall hard in spite of it, then we are looking at a weak market that may retest the previous swing lows.