Oversold bounce... or more?

Some positive earnings reports gave the market a boost.  Yesterday we talked about the possibility of seeing a relief bounce off of the short term oversold conditions.  On Wednesday we saw that as the S&P 500 gained back all of Tuesday’s losses, almost to the penny.  So is this a temporary bounce or the start of another bull market move higher?

The chart of the S&P 500 of the past year and a half shows us instances when the market was tiring, showing signs of a top (A), only to make one more push higher (C).  These moves higher always make us question the validity of our indicators as tops tend to drag on longer than you’d expect. 


                                  Chart provided courtesy of www.decisionpoint.com

Market bottoms are generally more obvious with either a “V” like formation, or a drop and a retest.  That last push higher, and even the retest of market lows, can make for some very uncertain times; A time when you should trust your indicators rather than your emotions.  

The question is have we seen the A, B and C already, and are heading down to D?  Or does the market have another C left?  We would really like to avoid missing a big rally like we did late last year / early this year, but the intermediate term indicators say we have more work to do on the downside. 

Anything can happen in the short term but we have seen that some steady short term gains can be lost rather quickly with one or two bad days.  And with our day to day and a half delay in transactions, that could cost you. 

So the short term indicators were oversold and we had a decent bounce.  The overhead resistance could be a target for a move higher at this point (currently 1275-1280), or if you keep an eye on the Nasdaq 100 you will see a gap in the chart between 1676 and 1684 that needs filling which could be a time when a relief rally runs out of gas.  Gaps tend to get filled eventually.

 

For the second day in a row the large cap stocks of the S&P 500 have outperformed the small cap stocks.  We talked about this as a possibility on Monday  as a large influx of money was moved into small caps funds over the past few weeks to tell us contrarian investors that large caps may be ready to outperform. 

Looking at the overbought / oversold indicator the short term trend is in neutral territory.  But the intermediate term trend is uncertain unless you believe the overbought condition has peaked at the end of 2005.  Sometimes the trend on the way down is an opposite mirror image of the way up (and vice versa.)


                                    Chart provided courtesy of www.decisionpoint.com

If that is the case this time, we could a short term bounce but the the next few weeks could bring it down deeper into oversold territory, possibly to -750 or lower.  This is what we would be looking for to get back into the stock funds.

That’s all for today.  Currently 100% G fund.  Thanks for reading.

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