Heading to Oversold Country

 | Sep 26, 2012 | 6:30 AM EDT
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It is curious the way the market finds its own reasons to rally or sell off according to the indicators.

Two weeks ago, when we were still oversold, but heading toward an overbought reading, the German courts agreed with the ECB's bank buying program and the Fed announced its open-wallet policy. Now here we are two weeks later, having gotten overbought on Sept. 14, completing a round trip from that news.

We now find ourselves heading toward an oversold reading. My notes say we should be oversold Monday, Oct. 1. Shown below you can see the chart of the Oscillator, which is not yet sufficiently oversold. In addition, you can see the table that shows the red numbers we will begin dropping on both the 10- and 30-day moving average lines of the advance/decline line next week.

I don't profess to know what exactly the news was that took the market down so hard on Tuesday. It could have been the protests in Spain showing up on our television screens or the realization that earnings are not very good. But you can see it is taking us toward an oversold reading.

Day    10-day ma    30-day ma

Monday 10/1         (1140)          712

Tuesday 10/2         (337) (403)

Wednesday 10/3    417    (327)

Thursday 10/4       (648)  (631)

Friday  10/5 524    (1096)

Let me add a few other statistics. The volume on the downside on the NYSE was 90% of total volume, something we haven't seen since mid-June. The TRIN was well over 2.0, something we haven't seen since the fall of 2011. The put/call ratio was the highest it has been since the final days of August as well.

I would like to see the VIX get jumpy and the put/call ratio to go over 100%, something we haven't seen since the final days of August. Perhaps that will come as we get closer to the oversold reading.

But as I have indicated, I expect to see failures on such a rally. Let's use the chart of the Market Vectors Oil Services ETF (OIH) to explain what I am eyeing. I realize I seemingly pick on the oils incessantly, but they have been a good guide for the markets. I would remind you the chart I showed here last week of United States Gasoline (UGA), an ETF to be long gasoline, has a tendency to lead the S&P, which is another reason I harp on this group.

OIH is coming into support as you can see on the chart. I have it marked in the 40-ish area. Should we get the oversold rally I envision, I can see it forming the right shoulder of a head-and-shoulders top. I have drawn in on the chart (in red) how I can see this chart developing.

I will be atoning for my sins (trading and otherwise!) as I observe the Yom Kippur holiday on Wednesday. My next column will be Sept. 28. To those who also observe, have an easy fast.



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