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Oversold S&P 500 Index

Sorry for the short post today but I wanted to make sure you saw this graph.

I haven’t annotated it so hopefully you can pick out the following:

1. Look at the big red bar in the main graph that is dropping below the blue price channel. This is an indication of a very oversold situation when prices move more than 2 standard deviations from the trend.

2. Look at how far below the 30 Line the graph has moved in the RSI box at the top. This says that the relative strength of the market is nearing a 10 reading, from which we should see a bounce in coming sessions.

3. Look at the two lines in the Full STO box, well below the 20 bottom boundary nearing zero – also indicative of an over-reaction to current events.

4. Why do I say overreaction? (a) Look at the Volume box and you can see that we are not experiencing a huge thrust higher in negative volume like we did in last August’s selloff; and (b) In the CMF box, you can see that the money flow in the market is definitely negative, but no in a huge way. These two things tell me that there is not a lot of conviction in the sales and that there are a number of bulls waiting to put money back into the market.

I have to run to a meeting, but I wanted to make sure that no one overreacted to May’s selling – at this point it looks like an orderly correction of the big move off last Fall’s lows to shake out the weak holders that may have just recently gotten into the market.

Have a great night!