Market breadth is getting very oversold again: can we expect another bounce or a meaningful rally soon?

Six weeks ago we observed market breadth (simple put the difference between the number of stocks advancing or declining on any given day; i.e. market breadth is negative when more stocks decline then advance and vice versa) was getting very oversold and forecasted either a bounce followed by lower prices or a meaningful rally was to be expected. We got a 30p bounce in the S&P500, a marginal lower, and now we’re back to where we started.

The below is re-posted, in part, from our recent weekly digest, available to premium members only. Please click here to become a premium member too so you get all this info and more first.

Question now is: what is market breadth doing now? Since market breadth allows for a “glimpse under the hood” we will assess several market breadth charts we follow this week: McClellan Oscillators and Summation Indices for the S&P500, NYA, and NASDAQ (SPXMO, SPXSI; NYMO, NYSI, NAMO, NASI; respectively). Why not only 1 or 2 charts? Because if all charts tell the same story the weight of the evidence then points to the same possible outcome.

First up the SPXMO and SPXSI: we see that on Friday the SPXMO actually went up on a down day, which is confirmed by the %-stocks above their 50d-SMA (not shown): a first warning sign for the bears. The SI is now below 0 and its RSI14 is now at the 2nd most oversold reading since this Bull began in March 2009. History tells us that from these setups important lows formed.

Figure 1. SPX-MO and SPX-SI: both remain in sell mode, but SPX-SI is once again extremely oversold.

spxmo

spxsi

Moving on to market breadth indicators for the NYA, we see a similar setup: The NYMO has now the potential for double positive divergence, while once again entering our “buyable zone”. In addition, the NYSI is like the SPXSI dropping below 0 (buy zone) and is also extremely oversold. The green box shows the only reasonable similar setup we could find for this Bull. However, there is no turn in sight yet, so we have to wait for breadth to turn back up and provide buy-signals first to signal the low is in.

Figure 2. NYMO and NYSI: both remain in sell mode, NYSI also again extremely oversold.

nymo

nysi

Lastly, market breadth for the NASDAQ. Also here we see possible positive divergence, and breadth dropping once again into our “buy-able” zone. The NASI’s RSI14 is now at its 2nd lowest since the March 2009 Bull started –black solid horizontal line- and the lowest reading (black dotted vertical line) tells us that back then in 2010, the market bounced, dropped to a marginal lower low and then rallied for another year. Although past performance is no guarantee for future results, it’s the closest analogy we have with the current situation.

Figure 3. NAMO and NASI: both remain in sell mode, but SPX-SI is once again extremely oversold.

namo

nasi

Based on these markets’ breadth charts, we can conclude the market is much closer to a bottom then a top and if a bottom is struck (soon as the RSI14 is running out of real estate soon) it will very likely be a significant one.

Re-posted, in part, from our recent weekly digest, available to premium members only. Please click here to become a premium member too so you get all this info and more first, and have the edge.

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