We Can Rally

 | Oct 10, 2012 | 6:48 AM EDT
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On Tuesday the PowerShares QQQ (QQQ) traded 60 million shares. Often when we get a high volume down day on the Qs (we rarely see this sort of high volume on the upside) we get a rally the very next day. See a similar decline on high volume in early May (circled on the chart).

Typically we would think that such a hefty down day would show us 90% of the volume on the downside, but that did not occur in early May and it did not occur on Tuesday either. But the heavy volume in the Qs, when it arrives after a series of lighter volume days, often leads to an up day the next day.

But let's look at the indicators once again. The number of stocks making new lows expanded once again. We have only just gotten overbought on an intermediate-term basis, so rallies ought to be short lived now. The VIX did not get jumpy. The McClellan Summation Index is still heading down and after Tuesday's rout it will now take quite a rally to halt its slide.

What is most shocking to me is how pathetic the oversold rally was. I feel as though I need a magnifier to see it on the Oscillator chart of Nasdaq. A market that is oversold and cannot rally is not a healthy one, especially when it is trading near its highs.

The good news is that the put/call ratio did go to 100% for the first time in 26 trading days, so at least there was some level of fear out there. That means we can rally, but rallies should still be sold.

I think the question I was asked most often during the trading day on Tuesday, aside from if Apple (AAPL) could bounce -- and I do hope everyone enjoyed my handdrawn chart I posted in the middle of the trading day showing Apple's support line -- was when we will get oversold again. Wow. Folks, we just got overbought.  Again, that doesn't mean rallies are out of the question. Heck, I think we should see a rally attempt on Wednesday. But take a look at the 30-day moving average of the advance/decline line and note its position of overbought.

When I look at the math, I do not see this indicator reaching an oversold condition until late October and, curiously enough, that oversold condition arrives just before Election Day.

Do notice that the indicator does not correspond to every swing on the S&P, but it's the series of lower highs that I am keying off of. Because of that I think we need to wait until this is back to oversold before we would look for any rally that is sustainable. I remain in the camp that thinks rallies should be sold.

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