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Stock Market Oversold Bounce...

Stock-Markets / Stock Markets 2012 May 22, 2012 - 02:59 AM GMT

By: Jack_Steiman


When the markets opened for trading today, we had the following oscillator readings across the major indices on their daily charts. We had the Dow, and this was the least oversold, at 25-RSI and a 1 stochastic. That unto itself is deeply oversold. We followed that up with a 23-RSI on the S&P 500 chart with a 0, yes, 0 stochastic reading. The numbers on the Nasdaq 100, the most oversold at 21-RSI and 0 stochastic. Call the bears off for a while when there are those types of readings. We were simply too oversold to get involved with any down side action in the very short-term. The oscillators need to unwind up on those daily charts for the bears to be able to get any sustained downside action in the future. This is a game, and, often, the game plays by certain rules that never seem to change.

Extremes on both sides of the ledger lead to opposite type of action for some days, or possibly even weeks, to come. We saw that happen when we got too oversold coming into today's action. Very little news could change the market's mind about unwinding back up some. Sure, there's always that one piece of news that can keep them oversold, but in reality, it's tough to keep a market moving down in these conditions, unless you get the absolute worst news. Today showed how quickly things can reverse when there's simply too much near-term pessimism in the market. The reversal comes from deeply oversold conditions that should have some legs left to it.

Today, the rally was across the board for the most part. Just about every sector was participating, even with the disaster that occurred with Facebook, Inc. (FB) today. The stock was propped up with 9.9 million shares on the bid at 38.00 late Friday. The underwriters were too embarrassed to let the stock fall below the initial offering price. Today, it gapped below 38.00 at the open, and never looked back. It fell all day, yet, interestingly enough, it had zero effect on the stock market. One would have expected that the market would fall hard if Facebook fell hard. It didn't, and that was good to see, since every single person in Facebook, from the initial price on up, is now under water in a fairly large way. It leaves a very sour taste to the masses, understandably so.

Facebook, however, may be pretending something is not so good for the bigger picture as its fascinating to see the stock act this poorly, considering all the hype that went into it. We shall see, but you get the sense Facebook is not good for the bigger-picture stock market, once these very oversold conditions unwind on all the major index daily charts.

It's important to keep in mind, when markets get too oversold, they can bounce, and bounce hard, for some days, or weeks. This does not mean that all is well with the markets. You should never say never, but the technical damage done from this move lower is immense. There are massive gap downs across the board along with the loss of most, if not all, key exponential moving averages. Most of all, these losses were done on some very high volume trends, which confirms the price movement. There's never a guarantee that we will get as high as the 20- or 50-day exponential moving average, but it is possible, especially since the 20-day exponential moving average is only 3% away. It would be much tougher to get to the 50-day exponential moving average.

I really don't think we will, but unwinding the oscillators up by getting to the 20's, would be a good thing for the market and the bears. That would allow for the market to once again have more sustainable down side action. It's just not possible now, unless we get the type of news no one wants to even think about. For now, you can be slightly long, but nothing even close to approaching aggressively so. I would not be shorting here, however. It's just too much risk short-term being as oversold as we still are right now.

So where can we go to the upside? It's impossible to tell, but again, let's focus on how far many of these rallies can go from past work. The Dow closed at 12,504. The 20- and 50-day exponential moving averages are at 12,795 and 12,891 respectively. That's roughly 2.5 to 3.5% higher. The S&P 500 closed at 1316. Its 20's and 50's are at 1349, and 1362 respectively, or 2-3% higher from here. The Nasdaq 100 closed at 2847. It has its 20's and 50's at 2926 and 2960 respectively, giving it 3-4% possible upside. The 20's are more likely. That would be the lower end of the percentage range. It probably won't be a straight ride up to those levels, but we can hope it will be.

Play it slow and easy, but with an upside bias very short-term.



Jack Steiman is author of ( ). Former columnist for, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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© 2012

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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