What we learned from Monday's market is that, at least for now, nothing has changed in the market. Getting overbought on a short- and intermediate-term basis still matters. I should make a point to note that my oscillators are based on breadth, but also on a time factor so no matter how far the market goes down in one day it doesn't change the fact that we're still overbought.
In fact you can see the Oscillator looks as though it has barely budged. It is not even where it was last week, nor is it under the zero-line. That will take time to get it there, and likely more downside too but the time is a big factor, as well.
You might have noticed how poor breadth was. At negative 2,210 for the New York Stock Exchange (that's advancers minus decliners), it was the worst showing since late September, although Oct. 7 came quite close. But let's put that in perspective. You see, for the first time since early October, the McClellan Summation Index stopped going up. It will need another poor breadth day to actually roll over but that is a change. Up until Monday all the down days, even Nov. 2, when the S&P 500 lost nearly 100 points on the day, the Summation Index was still heading up.
Sure, it was because energy rolled over. And the banks. The banks actually broke that uptrend line and relative to the S&P they are now where they were in late 2020.
But it wasn't just the banks and energy. The transports, which you might recall also made a lower high last week, were down quite a lot. They are now about to test this uptrend line and if I had to guess this line will get broken in the coming weeks.
In other words the poor breadth was so widespread that we had over 90% of the volume on the downside, something that occurred a month ago (Nov. 9) and a month before that (Oct. 7). The main difference? Compared to those two times we are now overbought but we were not back then.
There is one more chart that is quite important to watch and that is the Russell 2000 fund (IWM) . I've drawn in this uptrend line for you last week, when I expected to see a bounce from it. But now notice that it has made a lower high and is right back to the uptrend line. I believe a small bounce on Tuesday would probably lead to a break of this line later this week.
Can we bounce on Tuesday? Sure. Typically after we see 90% of the volume on the downside we get a relief rally. My call is still for more volatility and if that Summation Index rolls over I would then expect more than just a pullback.