Volatility May Be the Market’s Medicine — and It Could Spark Another Rally

For the last several days, the market has felt almost zombie-esque as it shuffles around. Some days it gaps up and sits there. Some days it chops around. But it surely doesn’t feel terribly exciting, does it?

Just look at the IWM; it is the same price it was a week ago. In fact, it gapped up on the 17^th of April and has just sat there since. I maintain that this is the overbought condition at work. Overbought doesn’t always mean we have to go down, but rather that the market should lose upside momentum.

The Midcaps are no different. They, too, are sitting around.

Now let’s look at the Overbought/Oversold Oscillator. It has really come down, hasn’t it? It is not oversold yet, but at least it is heading back and getting close to the zero line.

Even Nasdaq, where so much of tech lives, has seen its Oscillator come down quite a bit.

Then there is the more intermediate-term 30-day moving average of the advance/decline line. It is creeping up on an overbought reading, but it is not yet there. In fact, the math says it could use a few days of pulling back before it makes another push upward. I estimate it will be overbought in early to mid-May.

Keep in mind, just getting overbought is not negative. The negative is if we get overbought and there are a bunch of negative divergences that are accompanied by too bullish sentiment. That’s why I continue to harp away that the new highs are lagging.

But I think we should also watch the new lows. So far, they have remained rather tame. The Nasdaq new lows have been hovering just over 100, which you can see is fairly standard for this market. The concern would come if we see the new lows start to double and get into that 200 area.

Another intermediate-term indicator I am watching is the ISE Call/Put Ratio’s 21-day moving average. It turned up as expected and is now approaching 1.30. My estimation is that it has room to keep rising (up is bullish for this indicator) until around the second week of May. And it ought to do that no matter what the market does, even if it pulls back.

This is why, even if the market pulls back later this week, I continue to believe that we’d rally again. The intermediate-term indicators still have a window that is open for rallying. It doesn’t matter that the Russell or the Midcaps have stalled out. It doesn’t matter that they may pull back (they ought to). What matters is if Nasdaq’s new lows rise to that 200 area, especially as the intermediate-term indicators get overbought. What matters is if breadth can’t get going again as we get to that mid-May time frame.

I think we can use a quick bout of volatility, just to shake things up. Just to get the market off autopilot. But if we get that, I think we’d rally again.