Learn to Love the W-Bottom

 | Feb 13, 2018 | 6:00 AM EST
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And so it begins. We finally get the first "V" of the rally and I am asked why must we have a "W," why can't it be a "V"? Human nature simply never changes. When the market is going down you think it will never rally again. When it's going up you think it will never come down again.

Sure this might turn into a V but I addressed the V bottom yesterday by noting how 2014 turned out. Or we can take a look at -- oh I don't know the September 2001 rally, since that was one I was asked about. Isn't this similar to the 2014 rally we looked at yesterday? A big low, a big rally and then months of going nowhere. And just to keep the record straight, when this one came down in the spring of 2002 it didn't retest, it collapsed. In that respect I would say somewhat similar to the October 2014 low and the August 2015 collapse. Only in 2002 it was a full fledged bear market.

I know everyone wants the market to go back to the way it was a month or so ago, when we went up day in and day out, but that is as unusual as last week's massive move. My experience is that V bottoms are not long lasting and are not what you want to see. Embrace the W!

But before we get to the W we are not yet overbought so let's not put the cart before the horse. You can finally see the rally on the Oscillator chart.

Let me report that the Hi-Lo Indicator did in fact fall under 15% on Monday, to 13%. So this is officially the first intermediate term indicator that has moved to an oversold condition. Again, I remind you that this indicator tends to see a W as well.

What I find interesting is that Nasdaq's Hi-Lo Indicator is still at 26%. I suspect Nasdaq's has further to fall, just based on the math behind the indicator but it is unclear to me whether or not it will make it all the way under 20%. Nasdaq seems to get grossly oversold when it goes under 20%. If it is going to get there it will do so in the next few days so I will keep you posted.

Aside from that there wasn't much change in the indicators on Monday. As the oversold rally works through the markets I will keep my eyes on the breadth. Recall all those discussions about breadth from a month or so ago. When we see long term divergences in breadth it's time to fret. The breadth during the rally hasn't been leading the way but at least it isn't negative.

 

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