When you look at a chart of the S&P 500, you can see many things.
Some will see an island top (the gap up two weeks ago and the gap down this week are the "water" around the island.
Some will see the possibility that if we rally from here, to say 4200-4230, we could be making a small head-and-shoulders top.
But I like to step back and take a look at the chart. All I see is that 4100 seems to be quite a level on the chart. Just look at how the March low was around this area. Then we broke it in May and whooshed. The rally in late May stalled out here, too.
Then we paused at 4100 in early August. And the last rally upward to 4300 was fleeting as we are now right back down there. It's like a magnet.
It is hard for me to believe that my eyes are that good or that my chart reading skills are so far superior to anyone else's that this level is not, "Oh so obvious" to anyone who looks at this chart. I can only assume that means if we break it, folks will fuss all over the place. You know, the same way they obsessed over that 4230 level, because it was a 50% retracement. Lotta good that did.
The one thing I know is that if we rally from here, it will make folks feel better. Especially if we rally, because folks perceive that the Fed has softened its stance.
After all, much to my surprise, the Investors Intelligence bulls went nowhere this week. They did not fall as I had expected. This means they remain at 45% bulls (and 29% bears). If we rally, that number should rise, not fall, meaning bullishness is increasing not decreasing.
But are we oversold? We're not at a good oversold condition in my view. I would say we have worked off the overbought and are heading toward a short-term oversold reading. I do think we will be short-term oversold next week, so we're getting there.
The Volume Indicator just reached an overbought reading last week (mid 50s is overbought) so with it at the current 54%, it is nowhere near oversold; it remains overbought.
That's why I consider the market ripe for volatility. We plunged this week and went nowhere. If we rally next week I don't think we're going anywhere either. But I do think if we break 4,100 we'll see bearishness rise quickly.