In my last column I wrote about how if the market came back down again in the coming days, we'd go right back to an oversold condition using my own Oscillator. That must seem odd to some, considering we had a big oversold rally last week.
My own Oscillator is the 10-day moving average of the net of the advance/decline line. So we look back 10-days ago to see what numbers we are dropping. When we drop a long string of positive readings, we consider the market overbought. That's because this is a momentum indicator and to gain more momentum you would have to replace a positive reading with a larger positive reading.
The same is true for an oversold condition. If we are looking at dropping a string of red numbers then we consider the market oversold because to get more oversold we'd have to replace these red numbers with even bigger red numbers. A truly strong market will get overbought and stay there and a truly weak one will get oversold and stay there.
You can see the chart barely shows last week's midweek rally, because the math behind last week's oversold condition wasn't supportive using this particular metric.
Now let's take a look at the numbers this indicator is dropping this coming week. Monday is a rather benign reading in that we could consider it practically red. Tuesday is the last positive reading we drop until next Monday. As you can see, any decline early this coming week would take us right back to another short-term oversold condition.
Then there is TRIN -- the Trading Index -- where the 10-day moving average of this indicator moved up and over 1.2 this past week. That makes this indicator oversold as well. I have noted the green arrows on the chart for the prior readings in the last year. Here's what it doesn't tell us: Is it an oversold reading that is long lasting or a short-term one?
The 10-day moving average of the put/call ratio has finally started pushing upward with some vigor. It is now approaching the same level it saw in May. Notice that in May it had to push up there twice. Also notice that the big peak in this indicator in late October only led to a short term rally.
Some indexes like the Russell 2000, the Bank Index and the Transports made their highs a year or more ago and with the exception of that three week plunge in December, they have been in a trading range since the fall of last year. Longer term that is not bullish, since the longer it goes on -- no higher highs -- the more we'd consider this a negative divergence.
Most of my intermediate-term indicators are still not oversold, so despite that these shorter-term oversold conditions are still present, I remain in the same camp I have been: Up then down. Quite frankly, if we go back and look at the market over the last 18 months we can see despite the indexes going nowhere, there has been a lot of up and down. That's been the trend in the market. It's best to be flexible.