It's time to discuss my Overbought/Oversold Oscillator.
For weeks now I have been complaining that we never manage to get to a good oversold condition, because we get these one or two day rallies each week. To get a good oversold reading, we need a long string of red. Yes, to get oversold, you have to go down. That's the way it works.
If we can get a few more of these red days we will finally get to a good oversold by midweek next week.
Then there is the Nasdaq Momentum Indicator, where I use price to determine a short-term oversold condition. Here I plug in lower closes for Nasdaq every day until I find the point where lower closes no longer matter to the Momentum Indicator, meaning the indicator goes up even if price goes down. That is the definition of oversold. For weeks now, the best I've been able to come up with each time I plug in lower closes is chop.
What I have done now is walk Nasdaq down to 10,000 over the next seven trading days, and what you can see is the Momentum Indicator doesn't chop, it goes down and then shoots up, even as I walk Nasdaq down an additional 500 points. That turn up happens on May 17.
As a reminder, it need not be the exact day, but it shows us it is in our sights, especially if we can get just a bit more downside.
Why do I want more downside? Because that might even get Nasdaq to its next target. That big top on Nasdaq measures to the 10,000 level. Nasdaq currently stands at 11,364.
On Wednesday there were fewer new lows on both Nasdaq and the New York Stock Exchange than we saw on Monday.
We already know how sour sentiment is, but the Daily Sentiment Indicator (DSI) is back to 9 for both the S&P and Nasdaq. Recall the bonds saw a reading of 9 last Friday and they have enjoyed a nice rally -- even with that consumer price index reading on Wednesday of this week.
The Investors Intelligence bulls came down 3 to 27.6%, which is the lowest since they were 24.7% in the fall of 2015 and early winter 2016. They were 22% in October of 2008 (because I know someone will ask!). But it is the bears that caught my eye. They now number 40.8%, which is the highest reading since 41.7% at the March 2020 low.
Finally, the Volume Indicator, which I do not show very often, is at 44%. Readings in the upper 30s/low 40s have marked lows even in the worst bear markets. Another few down days would help this indicator.
I have asked for more downside this week, because I think if we can get it, we would set up for a decent bear market rally. Now will the market accommodate us? After all, who is going to trust any rally now, after six weeks of failed attempts?
The set up is there, let's see if we can get there.