Some Good Old Fashion Technical Analysis

Before getting to the charts, some general comments first.

1) Today is one of those days that is likely to have both bulls and bears frustrated. The bears are getting run over, and the bulls probably are not invested enough.

2) Sentiment is bearish, and this should keep a floor under this market; there will be buyers.

3) Having said that, the S&P500 has traveled 8% higher in 8 days.

4) The market has gone from oversold to overbought in 8 days.

Just another day in nutzville!

Figure 1 is a daily chart of the S&P500 (symbol: $INX) with the McClellan Oscillator in the middle panel and volume in the lower panel. Prices are below the simple 200 day moving average.

Figure 1. S&P500/ daily

Looking at the McClellan Oscillator, which is a measure of market breadth utilizing advancing and declining data from the NYSE, we note that it has gone from oversold (i.e., point #1) to its current state of overbought (i.e., point #2). Turning to volume, we note increasing volume (i.e., point A, lower panel) when prices sold off last month, and on the recent 8 day price rise, that has erased the memory of last month's sell off, the volume has been lackluster and falling.

Good old fashioned technical analysis would suggest that chasing prices here is not prudent. The S&P500 is below its 200 day moving average and overbought. One could argue that volume has been unreliable over the past year, but the diminishing volume suggests that this is a rally with little buying support. Furthermore, prices are at the upper end (or resistance level) of a down sloping trend channel.

Lastly, how do I know that overbought won't become more overbought and prices just continue to go higher despite the indicators? I don't know that answer, but with lackluster sponsorship, equities will be prone to selling. On the other hand, buyers who missed the bounce - and that is what sentiment tells us - will be lurking below.