Market's Oversold, Let's Talk Financials

An oversold market that cannot rally is a weak market. But it doesn't change the fact that we are still oversold. It's the same with an overbought market that does not go down. It is still overbought.

I have been keeping a close eye on the VIX in the past days and much to my surprise it still refuses to surge or spike.

However, it is now set up to do so, and if we get a spike in the VIX in the next few days, that would help the oversold rally case, because a surging VIX is typically associated with a market rally.

In the meantime, the financials have been all over the tape and the television in the past several days, so it is time to revisit them once again, since they have become the highlight group.

The Philadelphia Bank Index is now at 95.52. Some of you may recall, way back in January when I first started harping about this negative chart, that I calculated a first target of 93. We do not have to get there in a straight line (and we haven't so far), but I want to show you the longer-term chart of the BKX since yesterday's action broke this chart.

I did not put this chart up to scare anyone, but this is a break of a nearly two-year uptrend. It also confirms the top is now in place. I'm hesitant to start calculating very long-term targets for this chart, but since I know I'm going to get the questions, here it goes. I've taken the high of the pattern (105) and subtracted the low of the pattern (85) to get 20. Then I've subtracted 20 from the breakdown at 97, so that calculates to approximately 77, about another 20% down.

And you don't need me to tell you that the financials (well, the BKX) relative to the S&P have been even worse than when I last showed the chart.

But let's step back and take a look at the shorter-term chart. The Bank Index is now in the area of its October lows, which means it has some support here, but not a lot. And don't forget we're fast-approaching my first target of 93 on the BKX. Put that together with the surge in bond yields Tuesday and everyone on the "let's hate the financials" bandwagon, and the market is in oversold territory. I'd say we're getting close to a short-term bounce in the BKX.

I don't think we can bounce much past the breakdown level of 97 -- and maybe we can't even get that far -- but this negative financial chatter is reaching a crescendo, and that typically comes when we're closer to a rally than at a top.

So keep your eyes on the VIX. If we can get it jumpy in here, then we might just have that oversold rally.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

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Helene Meisler writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback and invites you to send it to [e-mail].