The volatility is still with us. And the statistics in the market remain awful. I mean, how can you possibly get excited when the net breadth on the NYSE during Friday's 42-point rise was not quite +1000 and the net decline during Monday's 15-point decline was nearly -1900. For those who are math-challenged, that's a gain in the S&P of over 1% (27 points) and net loss of breadth of about 900 issues.
But let's stop for a minute and consider that the Overbought/Oversold Oscillator reached its maximum overbought reading last Tuesday just as the S&P crested 2100 and everyone called for a year-end rally with much higher targets. Those folks seem to have quieted down, but let's take a look at the Oscillator.
It is finally heading to an oversold condition. Here's the problem: We want the market to stay down for another few days so that we can get to a good oversold condition. If we can get some red readings in the coming days, we can take a closer look at the numbers behind the Oscillator for next week -- but we have to get breadth red for a few more days this week first.
If we consider that the McClellan Summation Index is still heading down (bearish) but that it will now take a net differential of +2500 advancers minus decliners to turn it back up, we know that a few more down days would take this to +4000, which is when we consider it extreme -- and thus at a good oversold condition.
Take a look at the 30-day moving average of the advance/decline line. It too is finally heading to an oversold condition. Again, a few more down days this week set it up for a good oversold condition for the final weeks of the year.
Sentiment-wise, there is no panic. Heck, there was hardly any selling during Monday's decline unless we're talking a few select energy names. The 10-day moving average of the put/call ratio is already rising. So a few more down days should bring out more put buyers, which should in turn lead to higher put/call ratio readings, thus lifting the moving average to the point of "extreme."
On Monday, we saw the number of stocks making new lows expand greatly. The NYSE saw 335 new lows. So imagine if we can rally some on Tuesday and then come back down later in the week -- we might see fewer new lows. Or at least there is the chance we might.
The bottom line is the market and the indicators are still lined up for more volatility, but if we can get some decent downside in the coming days we'd have a setup for a Santa Claus Rally. I should note that each time I have laid out what is needed for such a rally this year, the market has jumped the gun and rallied too soon. So the rally doesn't last, instead it dies almost as soon as it gets started. So cheer for some downside this week.
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