You sure don’t see this every day…
Earlier this week, the Bullish Percent Index (BPI) for the S&P 500 (BPSPX) dropped to 1. That is the most oversold condition we’ve seen on this index – ever. It’s more oversold than even during the peak of the financial crisis panic in 2008.
A BPI measures the percentage of stocks that are trading with bullish technical patterns. There are many ways to interpret this index – but for the most part, if it’s trading above 80, conditions are quite overbought. A reading below 20 means conditions are quite oversold.
BPSPX hit 1. That means that just one percent of the stocks in the S&P 500 were trading with bullish technical patterns. That’s just five stocks out of 500.
We can’t get much more oversold than that.
In October 2008, the BPSPX dropped to 2. So, we got even more oversold this week than we were back then.
That sets us up really well for a sharp, oversold bounce.
When the market reached such extreme oversold levels in October 2008, the S&P 500 bounced nearly 20% in just over one week. A similar move this time around could push the S&P back up to 2900 by next Thursday.
Traders should keep in mind, though, this sort of extreme oversold condition can lead to a bounce. But, it doesn’t always mark the absolute bottom of the decline. The bottom usually comes after the BPI has formed positive divergence.
For example, the bottom of the market during the financial crisis occurred in March 2009. That’s when the S&P dipped well below where it was trading in October 2008.
But, the BPI for the S&P held well above the October low. This positive divergence was a good sign that the market was making an important, longer-term bottom.
The broad stock market is now set up for one heck of an oversold bounce. The BPSPX can’t fall much more from where it hit this week.
But, the real bottom of the market is going to come sometime in the weeks or months ahead – following what could be a large oversold bounce – when the S&P 500 drops to a lower low, and the BPSPX holds above the level it hit this week.
Traders can look forward to an oversold bounce over the next several sessions. But, stocks likely have even more work to do on the downside.
Best regards and good trading,
P.S. My colleagues at Legacy Research have been working around the clock to keep their subscribers up to date on what’s happening in the markets. And they recently launched a limited-edition special series of their free flagship newsletter, The Daily Cut, that they’re calling Market Mission Control.
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Today in the mailbag, Jeff Clark Trader members Jerry and Kathleen thank Jeff for his training resources and valuable trade ideas…
Jeff, I used to be in the business of financial planning (42 years). Since my retirement, I’ve been trading options in my own account (call options and covered call options) and have done pretty well.
I’ve been watching your videos [paid subscribers can access those right here] “Understanding Options,” “Buying Calls,” and “Buying Puts” – I wished I’d listened to them years ago. This is good stuff and I just wanted to let you know. Thanks.
Hi Jeff, thanks so much for your level-headed guidance throughout these volatile times. A couple of months ago you were waiting for GDX to come back to around $25, so when it hit $16.50 on Monday, I jumped in (after checking that it hadn’t been that low in five years).
Whilst you didn’t specifically send out a buy on this, I wouldn’t have found it without your advice. It’s already looking good at $24.
Pity we sold TVIX a week or two too soon. I got a great double-plus on NVAX. I really appreciate your calming advice. I haven’t sold anything that I bought with a longer-term view… I learned that lesson the hard way in 2008! Keep up your great work. And thanks again.
Jeff Clark Alliance member Jim and Delta Direct subscriber Julie share their gains from Jeff’s recommendations…
Nice call on the TBT calls. Sold today for a double. Thanks Jeff.
Just have to say thanks on the sell order on the TBT calls. I ended up selling for an 87.5% gain, a very nice profit. Thank you again! This past month has made me a forever fan.
Despite some trades being underwater temporarily, I’m also really enjoying your tips on the market. Wish I had time to be one of your Jeff Clark Alliance mentorship members, but hopefully you’re still doing the program when I retire.
I thought long and hard about it, but as a full-time physician, I couldn’t justify the
time right now.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].
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