Don't Trust Any Early Rallies

So all those folks who were so bullish Thursday night and Friday morning, after calling the low on Thursday, have rescinded their views. Doesn't that tell us they really were just afraid of missing the rally?

And although they likely still are afraid of missing any sort of oversold rally, Friday's action clearly put these folks back on the defensive.

Let's review one more time: the oscillator says we will be maximum oversold one week from today: Monday, June 19. I am hoping something happens in the market this week to shake out all those rally-callers.

I am hoping by the time we are set up for a better rally they have been shaken out enough times that, like October, they don't trust anything on the upside when it does come.

Some long-time readers also thought to ask about the 30-day moving average of the advance/decline line.

The 10-day moving average of the a/d line is the oscillator; it is short term in nature, covering a time span of (typically) one to three weeks in the market. The 30-day moving average is a bit more intermediate term in that it tends to cover three to six weeks in the market.

The 30-day moving average line will get oversold sometime between Tuesday, June 20 and Thursday, June 22.

As a reminder, when both of these momentum indicators are oversold, we tend to have a supportive rally in the market. That is one reason I continue to harp about that "week of June 19" time frame.

(For those of you who like to use the calendar as a guide as well, I would note, thanks to Jeff Cooper's excellent work, that the summer solstice is June 21 and that time frame often offers a turning point in the markets.)

Another indicator that works well when calling decent trading bottoms is upside volume as a percentage of total volume (NYSE) on a 30-day moving average. When this indicator gets down to the low 40% range we tend to be close to a rally.

It is currently at 45.4%. Because this is also a 30-day moving average, it has the same "issues" as the advance/decline line's 30-day moving average in that it is more likely to keep sliding this week than it is to rally. But sliding in this case is bullish because we want a reading in the low 40% range. Anything higher than that tends not to offer a good trading opportunity. In this case, down is good.

In sum, I would not trust any rally that begins early this week. I could possibly be cajoled into trusting one later in the week (Thursday or Friday) but I believe it is more likely that a decent rally develops next week, the week of June 19.

There is one more item of note to cover today.

I have been a fan of the banks for quite some time and remain that way over the longer term. However, the ratio of the BKX to the S&P, which broke out quite some time ago and continues to push ever higher, ought to run into some resistance in the coming week or so.

That downtrend line, which is very long term in nature, ought to stop the relationship the first time it gets there. I believe it means the banks, which have been excellent performers recently, will take a rest as we head into July.

Overbought/Oversold Oscillators

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

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Helene Meisler writes a daily technical analysis column. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.