In Focus: Oversold Rally Fizzles Out

By Lawrence G. McMillan

After some major oversold conditions developed, the stock market managed two tepid rally days and then one strong one. That brought the Standard & Poor’s 500 Index back up to its declining 20-day moving average, which is usually about the full extent of an oversold rally.

That moving average is at 1297 (and declining at the rate of about 3 points per day). Today, the S&P 500’s SPX -1.50% high was 1298.61, so that fulfills the “target” of the rally. Sometimes, these oversold rallies trade a bit higher, and we allow that it could theoretically trade up to 1310 and still not change the fact that the chart of SPX is in an intermediate-term downtrend. However, with this afternoon’s poor market action, it appears that the oversold rally has run its course.

So the trend of SPX remains downward, and that is the most important thing to keep in mind. A close above 1310 would turn the chart neutral, and we would re-evaluate if that happens. The oversold rally was able to swing some other indicators over to buy signals, but they are not as important as the price chart of SPX itself.