Oversold stock market sentiment has caveat

Except for marrying an heiress, robbing a bank, or committing premeditated fraud, there really isn’t anything that can make money faster for the astute and profit-minded than going short a bear trend. Naturally the first three options can also carry certain legal considerations that could eventually outweigh the risks of a short sale, but who’s counting….

Such has been the case lately on the short sale side of the equation. It took the venerable S&P 500 nearly three months to rally nearly 144 points from the November 16 short-term low at 1173 to what now looks like the Intermediate high at the February 18 peak at 1344.07. The net gain was nearly 177 points. But then it took only one month from February 18 to March 16 to erase more than one half that gain, or nearly 95 points. Not quite as much fun as marrying the heiress, but what a ride.

So, is what looks like a corrective decline over? Probably not.

From here on, while we could see some short-term rebounding action to correct near-term "oversold" conditions, we suspect more larger Intermediate weakness could follow because last week’s selling not only clipped from 1.5% (Dow Jones Industrials and Value Line) to 2.6% (NASDAQ Composite), but key Intermediate Price Channels (see Table below) were decisively cracked on the downside. While there was some recovery late in the week after last Wednesday’s intraday and weekly lows, those same Price Channels now have to be fractured on the upside to re-assert the bullish cause while changing the Intermediate Cycle from a negative bias to positive. That process could take some weeks.

Click chart to enlarge

And while it may be inevitable that Intermediate indicators like Momentum and our two Timing Oscillators are heading for negative territory even though all three remain marginally positive at this juncture, such weakness will still probably continue to develop within the context of a lingering Major Cycle positive that has been in an up mode since the March 2009 lows.

Underscoring that longer-term outlook we continue to see a somewhat positive tone in both our Call/Put $Value Flow Line (CPFL) and our Most Actives Advance/Decline Line. While the broad market has lost more than one half its gains since mid-November, CPFL has only dropped 10% from its recent highs to suggest that options players have been selling on balance, but not at a rate which reflects rampant pessimism. In fact, that group appears to be remaining somewhat optimistic DESPITE market selling. At the same time, while MAAD has declined with the broad market, the indicator is simply in synch with pricing and has exhibited no extreme negativity. As a consequence, in the face of no negative and longer-term divergence in either indicator, we must presume that recent weakness could prove to be merely corrective in nature on the longer-term trend.

In sum, we could see some rebounding action on the short-term trend once a minor cycle low is put in place and perhaps relatively soon. But such action would likely develop within the context of a still developing and negative Intermediate-term correction that has not yet run its downward course.

Index

Daily stops

Weekly Monthly
3/21 3/22 3/23 3/24 3/25 3/25 3/31

S&P

Last
1279.20

%Chg
-1.9%

BUY
1317.27

BUY
1311.32

BUY
1304.80

BUY
1277.30

BUY
1295.01

BUY
1307.87

SELL
1067.15

Dow 30

Last
11858,52

%Chg
-1.5%

BUY
12179.11

BUY
11949.27

BUY
12082.36

BUY
12018.95

BUY
11987.33

BUY
12041.81

SELL
9977.84

NASDAQ

Last
2643.67

%Chg
-2.6%

BUY
2751.29

BUY
2735.96

BUY
2720.59

BUY
2705.15

BUY
2693.61

BUY
2772.03

SELL
2145.96

Val. Line

Last
2909.27

%Chg
-1.5%

BUY
2993.31

BUY
2978.71

BUY
2964.63

BUY
2950.09

BUY
2939.89

BUY
2975.36

SELL
2241.20

Note: Stop levels, a function of the extant trend, are based on the trailing moving average price channels for the Highs or the Lows of an index. Whether or not a specific index is suggesting a "Buy" or Sell" is determined by whether or not index prices are above or below the current channel Stop levels. Stop levels should only be used as an entry or exit guide and in conjunction with other market entry and exit strategies.

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