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Getting Closer to Oversold

Wednesday brought us closer to a short-term oversold condition, according to my own oscillator.

The Market

Note: Top Stocks will not appear Thursday evening. The next letter will be Sunday night.

In one respect, Wednesday brought us closer to a short-term oversold condition, because my own Oscillator is based on a time factor, so the longer we go with negative breadth the closer we get to an oversold condition.

But let’s check in on the Nasdaq Momentum Indicator. Recall two weeks ago we looked at this indicator and noted that no matter what prices I plugged in for Nasdaq, the indicator went down. That’s what made it overbought. I have now plugged in lower prices for Nasdaq for the next week and a half, taking Nasdaq down every day and you can see that the Momentum Indicator turns up – finally - on Tuesday.

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Remember, the exact date is not the point with this indicator, it is more a function of when it gets close. This is one reason I had said over a week ago that if we saw the market down this coming week, I thought we could get oversold enough to rally as we headed into early March.

Also, Wednesday folks got decidedly more bearish. I don’t think we have real panic yet — how could we with the Favored Few green on the day? — but we certainly don’t have bullishness anymore. Thursday morning we will get the American Association of Individual Investors’ weekly survey results, and I fully expect them to show a marked shift in sentiment. Since I will not write Thursday night, I will definitely post the charts on Twitter so have a look there.

The CNN Fear and Greed Indicator is now at 21. I prefer when this indicator is confirmed by others, so I think we’ll see it lower before the eventual low in the market. However, recall in mid-January it was well over 90.

The Daily Sentiment Indicator (DSI) for the S&P is now at 22. Nasdaq’s is at 25. A reading under 10, and I would say it’s gone too far. But I do think we get a bounce before we get there. I would be shocked if we don’t. Although let me say now that if we bounce on Thursday, I do not expect Friday to have follow-through, just because the weekend looms and folks will be on edge.

All in all, I didn’t see much change in Wednesday’s action vs. Tuesday. We’re still oversold enough to bounce – at least Nasdaq did – but I still think whatever rally we get will come back down. It’s going to take time to line up all those intermediate-term indicators that got overbought in mid-to-late January.

New Ideas

Microsoft (MSFT:Nasdaq) preannounced their quarter, or at least said they would miss, after hours Thursday, so I thought I would point out that the spike low and that uptrend line are key to it holding. But quite frankly, it has left an island overhead, so if it cannot fill that gap near $177, I would think next time down it is going to break that uptrend line. In other words, failure to fill the gap above is bearish.

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Today’s Indicator

The Volume Indicator is at 48%. If it can get to the mid-to-low $40s, it will be oversold and the first intermediate-term indicator to get there.

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Q&A/Reader’s Feedback

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

The home builders have collapsed, despite great housing numbers. Toll Brothers (TOL) - Get Free Report broke a nice uptrend line. If it rallies back to the line I’d sell it.

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Pulte Group (PHM) - Get Free Report comes into some support in the $39-$41 area and I would expect it to have a bounce off that level, but right now that’s the best I can say about it.

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The iShares MSCI Brazil Index (EWZ) - Get Free Report) – an exchange-traded fund for Brazil – broke an uptrend line on a gap this week. It has pretty good support in the $38 area, but there is a measured target in the low $30s, so if it rallied to $42, I’d sell it.

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Facebook (FB:Nasdaq) looks to me like it topped out when it made a lower high in February. The good news is that the top is not that large, so if it came down to that $185-$190 area I’d look for a decent bounce.

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