Oversold stock market ripe for rebound, caveats abound

Weekly review: Intermediate cycle remains negative; major cycle neutral

Stock index, chart, technical analysis Stock index, chart, technical analysis

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1295.22

-58.17

-4.29%

Dow Jones Industrials

12369.38

-451.22

-3.52%

NASDAQ Composite

2778.79

-155.03

-5.28%

Value Line Arithmetic Index

2747.89

-160.94

-5.53%

Minor Cycle (Short-term trend lasting days to a few weeks) Negative

Intermediate Cycle (Medium trend lasting weeks to several months) Negative

Major Cycle (Long-term trend lasting several months to years) Positive / Neutral

In last Friday morning’s Market Snapshot we suggested that “attempting to bottom fish a declining market is a lot like trying to catch a falling knife.” In Friday’s trading that knife cut a bit deeper and may have had something to do with the poor showing in Facebook’s IPO that only eked out a 23 cent gain on the day, despite all the hoopla at the front of the offering.

FB aside, in just six weeks the major averages have erased nearly one half of the gains accrued during the previous seven months. That weakness highlights the old market adage that “Oversold” readings early in a new Intermediate Cycle negative aren’t necessarily “Oversold.” In fact, they are merely accurate to the extent the new trend is negative and more market weakness could follow. Thus the relentless “falling knife."

But it is a virtual certainty this bout of selling will come to an end and that some retracement action could follow. And soon….With the S&P 500 in the vicinity of 200-day moving averages, depending on whether they are calculated using a simple, exponential, or weighted average, some longer-term support could contain downside selling pressures. In fact, we wouldn’t be surprised to see some rebounding develop this week.

Market Overview – What We Know:

  • Friday’s selling was sixth session in row major indexes lost ground. Indexes also lost sharply on week.
  • In just over six weeks since S&P 500 hit short to intermediate-term high on April 2 (1422.38) major indexes have lost nearly one half of gains accumulated in same indexes over past seven months.
  • Short-term trend, as measured by MAAD Daily Ratio, remains in historically “Oversold” territory (.37) on Minor Cycle.
  • Intermediate Cycle remains negative and Major Cycle is “Neutral.”
  • Intermediate Cycle, as measured by Weekly MAAD Ratio, was last moderately “Oversold” (.62).
  • Weekly Trading volume on NYSE was rose nearly 12% and Average Price per share declined $1.58 to $55.12. Highest recent average price occurred on March 15 at $61.48.
  • Daily MAAD sank to another short-term low last Friday and was last at level equal to late December S&P 500 price of 1260.
  • CPFL was negative Friday by 2.03 to 1 as compared to Thursday’s level when ratio was negative by 4.24 to 1. Variance suggests rate of put buying is diminishing as some options players are also looking for bargains via call options.
  • Cumulative Volume (CV) in S&P 500 cash index and S&P 500 Emini futures contract declined to new short-term lows Friday.

Thing is, while the short-term trend could begin to show some improvement that would allow deeply “Oversold” near-term stats to head back toward “Neutral” or somewhat better, the larger Intermediate Cycle and how it will eventually relates to the Major Cycle could become an issue. Since the uptrend since October is now over, the challenge will be to determine where index pricing might make a stand at stability on the Minor and then the Intermediate Cycles. If the S&P 500 simply stages a classic 40% to 60% pullback, we would look for S&P pricing to put in place a short to intermediate-term low in the 1283 to 1213 range.

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