The other day everyone was quite focused on the 50-day moving average. I explained why I didn't see a reason to fuss over whether or not we held it since often we went over and came right back down and sometimes we went under and headed back up.
Is the 200-day moving average line any different? In the last year or so it has been a line in the sand so to speak. But in early December we peeked up over it - twice - and we went down anyway. In the spring of last year we got over it and still we came back under it.
Now take a look at the chart back to 2018. You have to squint to see it but in April and May 2018 we went under it only to pop back over it. In October and November we were over it twice before we gave way in December. Even in June 2019 we had a minor dip under it.
This is a long way of saying it's just a number. It doesn't mean anything if we hold it or if we break it. Focus on the indicators.
I also don't think it is a big deal if we can't hold over these two intersecting trend lines that it seems all eyes are focused on. In fact, I would love to see us bounce and then break it. Why? Because usually unless a well-watched level is broken, you don't tend to get panic or extreme bearishness as hope stays alive.
We enter this week in a similar position to last week. The short-term is oversold, although it's not a great oversold reading. The intermediate term is not oversold. I can no longer call the intermediate term overbought because we have now had three down weeks in a row. Heck, the Dow Jones Industrial Average is down on the year now.
The Overbought/Oversold Oscillator which is based on the net of the 10-day moving average of the breadth of the market looks oversold. The math behind it is interesting (and the reason I say the oversold condition is not great). You see we look back at the breadth for the last 10 trading days and to get a good oversold we like to see a long string of negative numbers to be dropped. Yet the last 10 trading days find us with five positive and five negative numbers.
The intermediate term indicators are coming down, but as I noted late last week, they are not oversold, they are just moving in that direction, having gotten overbought two weeks ago.
The 30-day moving average of the advance/decline line has come down quite a bit as you can see but it hasn't even gotten to the zero line yet (arrow). Under the zero line it would at least be 'getting oversold.'
The Volume Indicator has come down quite a bit as well. It started out at a very elevated (and overbought) 58% and is now at 49%. In bull markets, 47% is oversold. In bear markets, it needs to get lower than that (low 40s).
The Hi-Lo Indicator has been pushing down but is not oversold. In fact, the number of stocks making new lows on Nasdaq and the New York Stock Exchange have expanded once again.
The bottom line is the same as it has been most of February. We can rally due to the short-term oversoldness but I just don't see anything on the upside but chop at best for now. I will change that view when the intermediate-term indicators get oversold and we have some positive divergences and more bearish sentiment. Last week's action helped that cause as the complacency is gone and bearishness is creeping back in.
