Let's begin with the very thick blue line on the S&P 500 that we looked at a week ago. Why? Because many have asked what level that is at. Let's call it 3700. Let's also note that I use very thick lines. The reason is because the book I consider the bible of technical analysis, John Magee's and Robert D. Edwards' "Technical Analysis of Stock Trends," said we should use a 3% rule. That means that the line needs to break by 3% to believe the break is real.
Since 3% in this current market is approximately 100 points give or take, call it a range down to 3600-ish.
I still think this line is important in the big picture of the bear market. A break of it -- one that we can see without a magnifying glass -- would then leave a lot of resistance overhead, much the way the break of 4200 left a lot of resistance overhead.
However, I am still focused on the upcoming oversold condition. The 30-day moving average of the advance/decline line is set to get oversold midweek next week. Two weeks ago it was still hovering at the zero-line. It entered this week at -200. It now stands at -330. In May it got to -500 and at the Covid lows it was at -600. Based on the math behind the indicator, I think it gets to a good oversold condition next week.
My own Overbought/Oversold Oscillator is finally coming back down as well. I expect it will be back to an oversold condition midweek next week as well.
The Volume Indicator is at 47%. It too should get oversold (low 40s) sometime next week.
The number of stocks making new lows is rising but what I will be watching for is if the S&P gets down to the June lows, will new lows triple from here? Because that is what it will take to get more new lows than we saw in June.
Nasdaq would need to lose about another 600 points to get to the June low and the number of stocks making new lows would need to double to get to the June reading and triple to get to the May reading.
I do expect we will see new lows rise some more but I do not think they will triple.
I want to also note that bonds rallied and while everyone seemingly all of a sudden is keen to buy short-term Treasuries I would note that for the first time since mid-June, the yield on the 30-year closed lower than the yield on the 10 year. I am not a bond maven so I don't know the implications, but I do know that is a change. This 3.40% area on the 10 Year Yield is first support. Let's see if that can be broken.
Finally there is sentiment. The Investors Intelligence bulls have fallen to 30%. That is four points higher than the spring low, and down from 44% in August. The bears have not risen much, though. They reside at 31.4% where they were 44% in June. But the bulls have surely pulled in their horns.
The Daily Sentiment Index (DSI) for the S&P fell to 8. Nasdaq is at 10.
I still think we should rally by early October.