Markets hit extreme oversold levels on Monday, marking the second time in as many days that the market has done this. This may not be the first time there have been two such back to back days like this, but it is certainly rare and could mean that selling has hit an exhaustion level. If this is the case, then the market should bounce from here for a few days in a short squeeze/suckers rally. Those hoping for an end to the price destruction may get a reprieve lasting a few days, but that’s probably all it’s going to be.
Here is the evidence that leads me to believe a bounce of one degree or another is in the works.
We have had two back to back 90% + down days. Usually one is all it takes, though that hasn’t been working in this market.
$TRIN closed at 4.09 on Friday and then 3.01 on Monday showing massive amounts of selling which may be overdone.
$NYUPV closed at 43 on Monday after closing at 79 on Friday.
$NYADV closed at 296 on Monday when generally 500 is the line in the sand.
$NYAD, the daily, closed at -2494 when generally anything below -2000 indicates sufficiently oversold.
$NYUD:$NYUPV closed at -30 on Monday after closing at -14 on Friday when generally any close below -12 is sufficient.
Zweig Breadth Thrust closed at 38.81 when 40 is the line in the sand.
4 week New High/Low Ratio closed at 7.91, which is close to where it closed on August 4th so this is indicating extreme oversold.
$BPSPX closed at 26.60 where 25 is the line in the sand, but given the extreme oversold readings from other indicators then this could be enough.
$VIX closed above its upper Bollinger Band indicating overboughtness.
Many, many indexes and key sectors closed below their respective lower Bollinger Bands on Monday.
$TRAN closed below its lower Bollinger Band on Monday and did so on 202 million shares. This volume is nearly 3x normal volume, reeks of institutional selling, and is about the same as volume on August 8th. The rally leg in $TRAN that followed lasted about 4 days.
$NYMO and $NAMO are just a hare’s breadth away from tagging their lower Bollinger Bands.
On the chart of $NYMO below, I have marked where $NYMO has either tagged its lower BB or has gotten very close to doing so. In each of these cases, the market has bounced for a bit. In an up trending market, a tag of the lower BB is usually enough to halt a pull back and put the market back in rally mode. In this market, I expect that the current $NYMO situation will pause the selling for a few days and allow the market to rise. But given the current market environment, it isn’t likely that a bounce here will be sustainable.
Chart courtesy of StockCharts.com
It doesn’t matter to me whether or not the market should bounce. I have no intention of playing a bounce that may reverse with a vengeance. IMHO, the risk of capital loss far outweighs any potential phantom gains one could make investing on the long side at the moment. Give me a solid 5 day rally with noticeably improving breadth and then that’s another story.
Meanwhile, I’m just going to watch from the cheap seats.