Into the Thin Zone ... Stock Market Historically Oversold

By: Jack_Steiman

That's where we are and apparently why the most oversold conditions I have ever witnessed are, for now, being ignored. We're including a chart tonight that shows you exactly what the thin zone looks like. No real on the Sp until about 500. Now, and this is important to keep in mind, this doesn't mean we're headed there. The institutions will decide when they should come in and that could be well above 500. The key is simply understanding that the thin zone is alive and when it is, the shorts are less fearful because they know they're shorting without being near major support levels.

A free pass if you will. This is their game plan now. You can once the Nas went to new lows they got more aggressive and look at how some of those previously safe Nas stocks got hit today. Stocks such as Baidu.com (Nasdaq:  BIDU) and Amazon (Nasdaq: AMZN), to name just a few. They got crushed. Also add in Goldman Sachs (NYSE: GS) that has performed and held up very well lately. Just slaughtered.

Today was the day the big money went after those that have held up the best. Time to take everything down being their theme today. No place to run nor hide. This is why the Nas performed far worse than the Dow and Sp in terms of percentages today. The market lost 775 and then ultimately that key 741 level I spoke of and it's been all down hill since then for the market across the board. Some of the selling hard to rap our heads around because of the depth of oversold but this is what can and this time did happen once we lost 741.

So what type of oversold conditions am I talking about. Stochastic's on the weekly charts are around 6/7 with rsi's at 25/26. It's not just how oversold that is but how long they have remained there. That's what makes it so unique. But wait, it gets more amazing than that. The monthly charts are averaging stochastic's of 4/5 and the rsi's near 16. That's right, 16!!! It is so difficult to short that because it too has been at these levels for a long time and thus the risk/reward is just too dangerous. When this thing catches it'll catch big. The longer the oversold the stronger the bounce. it has been oversold for an incredibly long time and some very deeply compressed levels. You then add in the daily's which also have rsi's below 30 and stochastic's averaging 5/6 and you can understand my thinking that shorting just isn't the very best approach. This doesn't mean we don't go down to 500 on the Sp but I'd have to think that at the very least there is a rebound at hand, even if its just back to the 708 to 729 gap down levels from the very recent past.

The end of the day did see a very nice rally and this may be a prelude to some decent buying for the very short term. No guarantee of course but that would be my thinking. The rally up didn't make on a dent on the level of oversold and the market is loaded to the top with shorts so I believe we should see some type of follow through early next week. Again, 708 is the first big resistance the Sp will have to deal with. how pathetic is that but it is what it is. And we may not even get there but with the way the market came off the lows late in the day there is the strong likelihood that there will be some further follow through on Monday.

Let's not also forget that the weekly charts along with all the short term charts are showing strong positive divergences. This is important to take note of because when you have that along with the massive oversold conditions it makes it even more likely that some type of short term rally is upon us. The problem with thinking this is the big reversal is the lagging action in the technology stocks. At the real final bottom they will lead up and not lag so let's not get too excited about the next rally. It'll probably fail for another move lower before we finally do hit a solid tradable bottom.

There really isn't much to add here. The story is old and boring. The market is not ready for the big rally yet so don't get hooked on any early week rally we may get. I think the real big rally comes after this rally ends and we head lower still. Patience and let it all unfold. I know it's not fun out there but that's the cards we were dealt and we have to make the best of it.

Peace,

Jack

By Jack Steiman

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, 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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