I want to address some questions I have received in the last few days. The first question was essentially, hasn't there already been enough chopping around?
Sure, we have chopped a lot. The S&P 500 is the same place it was two months ago in mid-August, before that big run up. And now it has corrected, rallied, and retreated back to that spot again. Isn't that enough sideways action?
It may be. But I have my eye on the Overbought/Oversold Oscillator. Nearly two weeks ago the Oscillator reached a short-term overbought condition. It took a few days, but the overbought pullback developed over the ensuing week. The Oscillator is now back to the zero line. It should be back to fully short-term oversold late this week or early next week. Again, the timing is not perfect as you can see, but we are no longer overbought. That has been worked off.
Then there is the question about why I am not calling the current pattern in the S&P (and Nasdaq) a double top.
Why is it I am keen to talk about "W" patterns, but not "M" patterns -- for example bottoms, but not tops. It's because W patterns often come with positive divergences. I'd be happy to call what we saw a week or so ago an M, or a failing rally, if we had negative divergences. But we didn't. We had breadth make a new high.
Or, if we hadn't seen an increase in the number of stocks making new highs. But here, too, we saw the most new highs in months. That's with the S&P at a lower high. That's not a negative divergence.
I have stated I would love more folks to be calling it a double-top, because that would show me there was a marked change in sentiment. Sentiment remains the issue for me.
We have some anecdotal evidence that it backed off this week from the complacency two weeks ago. We saw that in my Saturday Twitter poll, where a week ago more than 60% were looking for more upside and this week only 48% were in the upside camp.
Saturday Poll— Helene Meisler (@hmeisler) October 17, 2020
The next 100 points for the S&P?
We'll get to see the various intermediate-term sentiment indicators later on Wednesday and Thursday this week to see if they have shifted but I can tell you we have not yet seen it in the put/call ratios.
Anecdotally all I hear is how the market should chop or could correct prior to the election. I see the market heading toward an oversold condition and I expect another rally prior to the election. If we can get the market down another day or so this week then that sets up a decent oversold rally for next week.
If we do get an oversold rally next week and it has negative divergences, then I'd be happy to fuss over the potential for a double top. But that's not what the indicators say happened nearly two weeks ago.