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What we learned last week is that the market hasn't changed its character. We learned that overbought readings still matter. We learned that fewer stocks making new highs still matters. And we learned that sentiment still matters.
If we take a look at how small caps, like iShares Russell 2000 ETF (IWM) , have done compared to large caps, like S&P 500 ETF (SPY) , we can see that the last five or six weeks has favored bigs over smalls. That is unusual for this time of the year. But then again, isn't that period from May to November supposed to be better for big caps than small caps? And yet that was clearly not the case as the ratio lifted from lows to a high.
What I find impressive about this action is that despite the underperforming small caps the McClellan Summation Index held up until last week. That is usually not the case as when small caps are underperforming often breadth is as well.
And the Summation Index did roll over, although the rollover is still pretty shallow so far. In fact, here's something else impressive: the S&P 500 has been up only two days since Nov. 23, the day before Thanksgiving (you might recall my call that we would be overbought right around Thanksgiving) and it is only down around two percent since then.
When we look at a chart of the S&P we see the big downtrend line everyone has on their screen and now we have the uptrend line, although my guess is most will insist on drawing the line from the spike low at 3,500 but I like mine better - it has more touches and is not as steep. Then there is that flat line I have drawn at 3,900. As I have explained somehow we get over and come right back down or we go under and rally. Now we have that uptrend line around 3,900 which makes the 3,900 area important this week because if it breaks, then it breaks two lines at 3,900.
So is the Oscillator oversold enough yet? It is oversold enough for a bounce, but I do not think it is sufficiently oversold for a rally that lasts longer than a day or two. It would be better - to get to an oversold condition - if the market just went straight down this week. But since the S&P has been red so often since Thanksgiving that is unlikely to happen. So we probably end up with more chop at best.
On the energy front Energy select Sector (XLE) has come down to the first support (blue line). Energy should bounce this week but look at the arrow from June because that is the sort of action I would now expect which is a bounce that fails and comes down again.
The good news for energy fans is that the Daily Sentiment Indicator (DSI) is now at 20 for crude oil so if I am wrong and there is no bounce this week and energy stocks just continue to plunge, then I suspect by the time XLE gets to that black line, the DSI is going to be telling us energy is a buy again because surely it will be a tween, not just a teen by then.