S&P recoups 50% of losses since September, but overbought in near term

Stock index, chart, technical analysis

Over the past two weeks and since its November 16 intraday low at 1343.35, the S&P 500 has recovered just over 50% of its losses since peaking on the Intermediate Cycle back on September 14 (1474.51). Given the fact it took nearly two months to get to that November low, recovery has been relatively rapid. But with strength, short-term market stats have moved upward from deeply “Oversold” conditions toward “Overbought” levels.

Accompanying all of this, trading volume has remained below normal.

So, if the market is engaged in a low volume retracement rally within the context of a lingering Intermediate Cycle negative, we would look for a “normal” bounce of from 40% to 60% before the larger cycle kicks in on the downside again. Such a reflex rally would put the S&P anywhere from 1395 to 1422. With Friday’s close in the bellwether at 1416, “normal” is suggesting that a near-term top could soon develop.

That’s unless there’s more power to this short-term rally than we expect. Then we would have to look toward the upper edge of the 10-Week Price Channel at 1453.21 (good through December 7) in the S&P, a point that would be equal to an 84% recovery of losses since mid-September. If the bulls still have it, strength back above the mid-September S&P at 1474.51 would then underscore a resumption of the long-term advance begun in March 2009.

And admittedly there are some points in favor of the bullish cause. First, selling since mid-September forced prices lower toward the uptrend line in effect for the better part of the past four years. Through this coming week that line will be plotted just below 1330. A resumption of selling and a new short-term low would not only position the S&P to re-assert its intermediate-term downtrend, but would also seriously threaten the increasingly mature bull trend.

There’s also the fact that readings on the larger Intermediate Cycle are now holding in “Neutral” to marginally “Oversold” territory in our more conventional indicators while reflecting “Oversold” conditions in the MAAD Weekly Ratio (.80) and in the CPFL Weekly Ratio (.51). Admittedly, however, “Oversold” in a new intermediate trend, just as was the case with the most recent Minor Cycle negative, can stay “Oversold” for an extended period of time. In other words, if the short-term trend flips back to negative and Intermediate Cycle selling resumes, currently “Oversold” intermediate conditions will only get MORE “Oversold.”