Oversold stock market ripe for rebound, caveats abound

Weekly review: Intermediate cycle remains negative; major cycle neutral

Problem is, what if selling evolves into something that is not “normal”? And why would it do that?

Market Overview – What We Think:

  • With major indexes within range of 200-Day moving averages and with short-term “Oversold” levels at downside extremes, we suspect broad market could be net higher by end of week.
  • While “Oversold” readings will take inevitably take hold and a near-term bottom will be put in place, attempting to “bottom fish” a declining market is difficult at least. 
  • Once any Minor Cycle retracement begins, we suspect it will prove to be short-lived and will do little more than erase “Oversold” readings prior to resetting market for another down leg within context of intermediate negative.
  • Best guess on how far this intermediate negative will carry would be toward 1283-1213 if “normal” 40% to 60% pullback develops.
  • Until proven otherwise, we must regard Intermediate Cycle selling as no more than corrective action within framework of Major Cycle positive.
  • Since majority of our key indicators did not confirm market strength into recent highs, we cannot rule out possibility more weakness might occur. Such selling could bring market pricing into line with negative indicator divergences.

First, stock market price action since March 2009, let alone since last October, has been positive to the extent it presented a buying opportunity that resulted in a 113% gain in the S&P 500 from March 2009 (666.79) to the April 2 high (1422.38). Recent selling, has shaved that gain to 94%. But no matter, that’s still nearly a triple since March 2009 if an investor bought at the bottom and sold a month ago. Fat chance….

Second, the problem many investors may now be facing is that they may have done some buying as the rally began and now with prices fading back toward purchase levels, do they hold or do they exit? Put another way, is this pullback that has been developing since the S&P hit its peak on April 2 merely a corrective phase worth holding within the framework of a primary bull trend that began in March 2009, or is selling the resumption of a bear market begun in October 2007?

Daily S & P 500 Index with Cumulative Volume

s&p, cumulative volume, technical analysis

Weekly S & P 500 Index with Cumulative Volume 

s&p, weekly, cumulative volume, technical analysis

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