In focus: Another Oversold rally

By Lawrence G. McMillan

After some relatively heavy, but orderly, selling in the past few weeks, oversold conditions finally reached levels that spawned today’s sharp oversold rally. But oversold rallies, while often unexpectedly strong, are generally short-lived affairs.

Is that going to be the case again this time, or is the bottom in place? It’s too early to answer that question, but we’ll lay out the criteria as we see them.

First, the Standard & Poor’s 500 Index ($SPX)  made new lows last Friday. However, when it did so, there were some oversold conditions and positive divergences that cropped up. SPX didn’t find its legs immediately, but after a tentative rally on Tuesday, a much stronger rally got under way on Wednesday (today). Even so, SPX has only recovered to its declining 20-day moving average. It has not traded above that average for a month. Oversold rallies typically rally back to or just above the declining 20-day moving average. Considering that today’s rally has just about reached that moving average, we might expect an overshoot to the 1,340 level or so (previous support, now resistance, denoted by the red line on the chart below), and still be in a generally bearish market...

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