In focus: Oversold, but wounded

By Lawrence G. McMillan

The stock market has broken down through several support areas, to the point where it is now below the important support at 1,340 on the Standard & Poors 500 Index. This has turned the overall picture negative, but it has also created some extreme oversold conditions.

It is common knowledge that a bear market can continue to decline, even while oversold conditions exist. However, they eventually give rise to very sharp, but generally short-term rallies.

The move downward has been very quick and without relief. The S&P 500 has declined on 9 of the last 11 days. The two “up” days were paltry, insignificant gains. What made this particularly nasty was the false upside breakout at the end of April. Following that, the break of support at 1,390 was significant, and most of the other support levels have not offered very much support at all. The 1,370 level fell quickly, as did the 1,358 level. That left the 1,340 level, which was major support back in February and March.

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