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We're Still Due for an Oversold Rally

If the market backs off on Thursday or Friday, or both, we should rally again next week, and then...

The Market

You already know where I stand on the market: I think we are due an oversold rally. And if we see the market back off on Thursday or Friday, or both, I still think we’d rally again next week. Typically after such a rally, we’d see the market retreat again.

For the last week or so, I have been harping about the intermediate term, noting that the intermediate-term indicators are not oversold. As time goes on and prices move as they have, those intermediate-term indicators begin to shift toward oversold conditions. I expect over the next few weeks we will see them shift in that direction.

So now let’s take a look at some of them. Let me begin with the McClellan Summation Index, because that has been heading down for nearly two months now. It now requires a net differential of positive 2,000 advancers minus decliners to stop going down. This is important, because once it gets to under positive 2,000, it gets a lot closer to being able to stop going down over the course of one day. In other words, one terrific breadth day can do it.

Wednesday’s market breadth was positive 2,130, which was the best day for breadth on the New York Stock Exchange, since early January 2019 – more than one year. For that reason alone, I think the day was a much better showing than Monday in the market. Even net volume, which I complained about on Monday, saw up volume at 83% of all volume Wednesday. That’s much better than the reading of 65% on Monday.

Speaking of volume, the Volume Indicator, shown below, is now at 43%. A reading in the upper 30s or low 40s makes this oversold. It was 41% in December 2018. In the depths of the 2008 decline, it was around 37%. I think this could go lower, but it is the first intermediate-term indicator that has dipped a toe into oversold territory. The chart is shown below.

Then there is total volume. I have posited that low volume rallies are the hallmark of the market. High volume tends to arrive with declines. That’s one reason I focus on the volume in the PowerShares QQQ Trust (QQQ:Nasdaq): High volume tends to lead to rallies. So do not be upset that Wednesday’s volume in the QQQs was the lowest in eight days; that’s the way it is supposed to happen.

The 20-day moving average of the NYSE Composite Volume is now closing in on the peak we saw in early 2016 near the lows. That is even more than the peak we saw in late 2019. What does this mean? It means there has been a great deal of selling, or unwinding, and remember my view: You cannot have a good rally until you see selling, because when there is a lot of selling there is not a lot of resistance overhead.

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The Hi-Lo Indicator for the NYSE gets oversold under 15%. It typically gets down there, we enjoy a rally and it comes back down. As of Wednesday it is at 18%, so it is almost near its first oversold reading. Nasdaq’s is still at 25%, but you can see the chart here.

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On the sentiment front, I have seen the updated Citi Panic/Euphoria Model and it is still high. But the Investor’s Intelligence bulls are down to 41.7%. Bears are only at 20.4%, but the bulls are a big shift from the near 60% we saw a few short weeks ago.

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Wednesday’s put/call ratio was high, at 125%, so that has helped the 10-day moving average continue upward. I expect this indicator to peak in the next two to four trading days.

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New Ideas

I still expect more volatility in the weeks ahead, but I can’t take my eyes off of the chart of Wynn Resorts (WYNN:Nasdaq), because if it holds $100, it will be a nice trade long. And if it breaks it will be a nice trade short. Due to the oversold nature of the market, I’d look for a move up first, but a failure to get over $110 on a rally would have me looking for a trip back down.

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I was asked about Vaneck Vectors/Semiconductors fund (SMH:Nasdaq) and I can see this closing that gap at $145.

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Today’s Indicator

The Volume Indicator is below:

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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 case can be made that EXACT Sciences (EXAS:Nasdaq) broke a head-and-shoulders top when it broke down recently. If it is a true head-and-shoulders top, then a rally back to that $80-$82 area should be sold. I’d consider myself wrong if the stock traded over $85.

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Amazon (AMZN:Nasdaq) bounced off support and now it needs to do a lot of work sideways before it can expect more than an oversold rally. If it gets back to the $2,100 area to fill the gap it’s a good place to sell.

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Schwab (SCHW) - Get Free Report left behind an island top when it gapped down on mid-February. It has support as it gets near $35-$36, so I would expect an oversold bounce from there.

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