I'm not sure you can call the action in the market this week anything but sloppy. I called it mixed when the week began but that's more of a euphemism. Oh sure the S&P began the week about 20 points lower than it is now but there's been a lot of slop in that 20 points.
For example, the S&P is up 20 points but net breadth is negative by about 1200 issues. The Russell is down 10 points since last Friday. That does not make for a pretty picture. For the last few years I have used the trading range on the chart of the S&P to the Russell using the two black lines on this chart. With the exception here and there we have stayed in that range. Now we have broken out for the first time since early 2016.
Glance over to the left side of the chart you will see that in 2007-2009 this ratio spent a lot of time over that 1.80 zone. So is this 2007-2008? Or is it 2016?
I can make the case for either. You see I have noted before that when the spread between the 50- and 200-day moving average lines gets as wide as it has now it tends to only do that in bear markets. That's the case for a bear market. I am not saying this will turn out like 2008, just that when that indicator gets like that it tends not to be a short-term decline.
Then I go and look at the four-week moving average of the AAII bears and I see that this general level has been a low in the market every single time except for the 2008-2009 period. In that period it spurted up well over 50%.
What I am focused on in the next week though is the fact that we will be oversold. My own Oscillator will be oversold on Wednesday. The Nasdaq Momentum Indicator will get oversold after Monday's trading. When I walk Nasdaq down 200 points in the next week or so you can see that the Momentum Indicator turns up after Monday's trading. That's the definition of oversold.
The date does not need to be exact, but it's a guide.
Sentiment, as you can tell from the AAII chart above, is sour again. The 10-day moving average of the put/call ratio is still too low for my taste. Thursday's daily reading was 116% which is the highest reading we've seen since the late October low. It is possible that the next few days can get high readings, enough to surge the moving average but I am not hopeful it will.
Rather if we crack from here it is likely the more volatile Daily Sentiment Index (DSI) which currently stands at 21, would fall to single digits which is what happened at both the late October and late November lows.
That's my case for a Santa Rally to begin next week. It's the longer term that continues to be a problem.