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Another Reason to Look for a Bounce

Believe it or not, that’s probably a good sign.

Ouch.

Selling pressure continued to hit the stock market yesterday – taking out technical support levels one by one. The S&P 500 could not hold up at the 2725 closing low from two weeks ago. The index made a feeble attempt to bounce when it tested Tuesday’s intraday low at 2691. The S&P popped about 20 points higher from there.

But, the pop was short-lived. Sellers stepped up again and hit the market with wave after wave of sell orders.

By the time the closing bell rang yesterday, the S&P was down 85 points. The index is in negative territory for the year. And just about nobody I know is looking forward to the opening bell today.

That’s probably a good sign.

Investor sentiment – a contrary indicator – is now about as bearish as it has been at any point this year. Many technical indicators are in “extremely oversold” territory.

Some of our favorite indicators – like the CBOE Put/Call ratio, the McClellan Oscillators for the NASDAQ and NYSE, and the price levels of VIX options – are all at levels that occur at or near at least a short-term low in the stock market.

But, as I reviewed various indicators last night, it was the following chart that caught my eye…

This chart shows the percentage of S&P 500 stocks that are trading above their 200-day moving average lines. Last month, this chart was at 75. Today, it’s at 34.

Think about that for a moment. Even during the two-month correction earlier this year, most stocks were still holding above their 200-day MA. Today, after a two week decline, far more stocks are in oversold territory.

Even though the S&P 500 is “just” about 10% below its all-time high, this chart tells us the average stock has sold off far more than the indexes.

This is just one more indicator to throw on top of the pile of oversold indicators. The proverbial rubber band is now quite stretched to the downside.

I can’t tell you exactly when a bounce will develop. But, there is a bounce headed our way.

And by the deeply oversold status of many of the technical indicators, I suspect it could be a violent move to the upside.

Best regards and good trading,

Jeff Clark

Reader Mailbag

When do you think a bounce in the market will happen? Do you agree with the bearish investor sentiment?

If you have any other trading questions, suggestions, or stories send them to feedback@jeffclarktrader.com.