Answering the Age Old Question, Are We There Yet?

The Market

Here’s the question of the day: Are we there yet? Let’s go through the indicators to see how we need not go down every day this coming week but some more downside would be a positive for an upcoming oversold rally.

Let’s begin with where I might be wrong on something. I said I thought that if the S&P made a lower low, I believed we would not see more than 260 new lows. Friday the S&P did make a lower low, and we did see fewer stocks make new lows (233). So why might I be wrong? Because if we do get more downside this coming week we might get more than 260 new lows.

Now, let’s move on to my own Oscillator. As you can see, it is heading into an oversold condition again. Thus far, it is at a higher low (a positive), while the S&P is at a lower low.

But the math behind it says we need a few more down days to get to a really good oversold reading. You can see the math in the table below. As a reminder, we want to see a long string of red numbers to be dropped for a really good oversold reading. We’ve been doing a good job of filling them in but the longer the string the better the oversold condition.

Now let’s take a look at the Russell Momentum Indicator. I have done the same with Nasdaq and the result is the same. What I do here is plug in lower closing prices for the index to determine the point where the Momentum Indicator stops going down. Here I have taken the Russell down by approximately 100 points over the next week or so and the indicator not only stops going down, it turns upward on January 21st.

As a reminder, the exact date is not important but rather the general time frame. So in this case I would say we are heading into an oversold condition.

In terms of sentiment I do not see any panic. Oh maybe there are some pockets here and there but overall, I would say we are seeing more folks giving up the bullish stance. For example, the AAII bulls were 34.7% while the bears were 37.4% so this particular indicator now has more bears than bulls. Last week’s Investors Intelligence bulls were down to 52%. I suspect this coming week we might even see it tipped into the 40s. That would be a marked change in sentiment from the 63% we saw in November.

The put/call ratios have come off the boil, but that’s where I see no panic. The ten-day moving average of the equity put/call ratio is finally lifting its head up. Just think what a few more down days would do to lift this up. At least it would finally look like there was some put buying going on.

The DSI for the S&P has come all the way down to 35. You might recall it was in the upper 80s around Thanksgiving. I don’t think more downside this week would get it to single digits (too far away) but into the 20s is doable.

In the big picture I still think there is too much speculation that has to be wrung out of the market but I believe a rally on Monday followed by some more downside later in the week would give us a good set up for a playable rally.

New Ideas

Home Depot HD has bounced off the top of support twice. The risk/reward seems decent here.

Today’s Indicator

The new lows are discussed above with the accompanying chart.

Q&A/Reader’s Feedback

McDonald’s MCD got taken to the woodshed last week and looks terrible but it is oversold, or close to it. If you want to trade this then something between 275-280 looks like the spot to take a stab as there is support as well as a gap fill. But it’s a trade, that’s it.

MP Materials MP is an old friend of ours but I had given up on it when it traded under 18. Yet now it has recaptured it and that gap up has consolidated. I’d buy a gap fill at/near 18 with an eye toward that old spike high near 24.

Coinbase COIN is trying to hold this 240 area so as long as it does so the stock is okay. The risk is that it comes down to tag 220 first so I’m going to have to couch it in the 220-240 area. A swift move to 220 might shake out weak holders.