John Magee, who co-authored the book, "Technical Analysis of Stock Trends," a book I often refer to as the Bible of Technical Analysis, used to advocate that to practice technical analysis, you should lock yourself in a room with no windows and no newspapers and just let the charts tell you what to do in the markets.
Magee, who passed away nearly 30 years ago, obviously said this before the advent of modern computers and the Internet, when access to news was quite different. As the news for financial markets gets seemingly worse by the day, it gets even harder to adhere to Magee's philosophy. But let's give it a try.
First of all, the charts look awful. There is no sugar coating it. The number of stocks making new 52-week lows expands daily. (HYG) and (JNK) , exchange-traded funds to be long high yield and junk bonds are seemingly falling off a cliff. Late last week, they started some selling in the Favored Few, but it's been minimal. And the Un-favored Many cannot find a friend in the world.
But if that was not the case, the market would not be so oversold. You don't get a market oversold by rallying every day. So yes, using my own Oscillator, it has finally pushed into oversold territory. Some other momentum indicators I use still need a little push down to get there, but on a short-term basis, we're there using the chart shown below.
The intermediate-term indicators are almost there as well, as if they are on the threshold of the room, but haven't quite taken the step inside. For example, the Volume Indicator is now at 45%. The low 40s gets it to oversold.
The Hi-Lo Indicator for Nasdaq is at 29%. Under 20% gets this metric to oversold.
Sentiment-wise, we haven't seen real panic, but rather just a lot of selling. Had we seen panic we'd have seen the TRIN (Trading Index) over 2.0 already. Had we seen real panic, we'd have seen a day where 90% of the volume was on the downside. Had we seen real panic we'd have seen the Volatility Index get jumpy.
But how can you not say sentiment is bearish when the American Association of Individual Investors' weekly survey shows bears at 40% and bulls at 24%. Or the fact that the put/call ratios have regularly been high, with last Wednesday's reading for ETFs well over 200%, or Friday's reading for equities at 83%?
Then there is the Daily Sentiment Index (DSI), which was over 90 six weeks ago and is now at 12 for the S&P 500 and 14 for Nasdaq. When these fall under 20, it means folks have turned bearish. When they get to single digits we've gone too far into bearish territory.
It's hard to imagine we won't enjoy an oversold rally this week, especially if we find ourselves with a down market Monday. Because one more down day and some of those indicators that are on the threshold will take a step inside the room.
Meisler will have a column on the 200-day moving average published Tuesday, but will not write a column until Friday.