Market Taking Too Many Days of Rest

 | Mar 17, 2017 | 6:00 AM EDT
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In the past when we've seen the Overbought/Oversold Oscillator get so oversold, we've seen the market rally hard for days on end. Up big every day, rarely taking a rest in the first days after the oversold condition arrives. This time the rally hasn't been filled with much oomph, with the exception of Wednesday. We've seen several days of rest.

As we look at the oscillator, we see it is still oversold. If we look behind the chart to see the numbers that make up the chart, we can see why it is not yet overbought. For this indicator, I use the 10-day moving average of the net of the advance/decline line. So we look back 10 days ago to see the numbers we're dropping. When we are dropping a string of red numbers, we consider the market oversold. Conversely, a string of black numbers (or green) and the market is overbought.

We can see the oscillator has lifted. But it's quite different compared to the way the market lifted from this same level in November. The numbers this indicator will drop next week, beginning Monday, are as follows:

As you can see, there is quite a bit of red going on there. That's why the window remains open for the oversold rally. Yet on Thursday when we dropped a reading of -1426, we added only +290. So it moves the chart up nicely, but how much progress was really made?

Something I also like to see when the market is this oversold is that the McClellan Summation Index, which is still heading down, needs only a day or two to turn it up from an extreme. You might recall this got extreme in the middle of last week. That means for four of the last five trading days, breadth has been green and still the Summation Index hasn't been able to turn up.

Typically, when it takes so many days for it to turn up, the rally loses steam too quickly. In other words, the window is open from the oversold condition, but if the Summation Index turns quickly with the oversold condition, it is typically a terrific buying opportunity. But when we get so far into the oversold condition -- let's call it halfway toward overbought -- and the Summation Index hasn't yet turned up, it often means the rally will peter out once we're back to an overbought condition.

It's not as though sentiment on Thursday turned cautious. The put/call ratio for ETFs was under 100% for the third consecutive day, telling us complacency is still the name of the game.

For more market analysis from Helene Meisler, sign up for Top Stocks, published five times a week.

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