And so it began on Thursday. How many times did you hear someone ask, "Is this the correction?" or "Should we sell in May?" I saw it several times. And we all know that if the market had been up this week, that would not have been a topic of conversation. Just think back to a week ago when everyone was so excited about the "breakout" in the S&P and higher targets were strewn around.
Therefore, the giddiness we saw last Friday when Nasdaq tacked on 36 points, breadth was flat and yet folks piled into calls like they were going out of style has disappeared. I suppose that's what happens when the Russell 2000 fall 5% in a week and Nasdaq falls 4% in four days.
Let's begin with the chart of the Russell. Most folks will draw in Line A on the chart. You should know this line already because I have drawn it in countless times for you. But now please look at the thick flat line I have drawn in. That was the breakout back in February, and we are now back at it.
Then let's do some math. The high was 1275. The small top had a support line I drew in several times this past week at 1245. The difference between the two is 30 points. If we then subtract 30 from 1245, we get 1215. The Russell's low on Thursday was 1216. So doesn't it make sense that the Russell tries to bounce from here, having reached support and its initial downside target?
For those who are wondering, yes, I see how a rally from here that fails to get back over 1240 will form the right shoulder of a head-and-shoulders top (the left shoulder being the high in early March). I will watch for that, especially since the indicators are still a bit mixed.
For example, the Overbought/Oversold Oscillator for the NYSE looks oversold. And it is, but it is only very short-term oversold. As you know, the input for this chart is the 10-day moving average of the net of the advance/decline line. So we look back at the last 10 days to see when the moving average will tick up (oversold) or tick down (overbought). I think this ticks up on Friday, based on the number we are dropping Friday.
Now keep in mind that in order to call the market a "good" oversold, we need to see a long string of negative numbers being dropped. That is not the case, since beginning Monday we have another string of positive numbers to drop.
As far as sentiment goes, we did see a shift as I noted above, but we have not seen that shift reflected heavily yet in the put/call ratio, and certainly the 10-day moving average of the ISE Equity ratio I have shown here a few times this past week hasn't yet run its course.
So it looks to me as if we should have a short-term rally, but then I think we come back down again.