360 Degrees of the Market

Upcoming Rally Won't Last Long

By Helene Meisler

This was originally published on RealMoney on March 2 at 8:31 a.m. ET.

It must be killing the perma-bulls that we aren't just turning around and zooming upward. After all, that has been the case for the past six or seven months. But I suppose that's why they call it complacency.

We are heading toward an oversold reading, which will occur sometime next week between Monday and Wednesday. It will not be a great oversold reading because the negative numbers being dropped on the 10-day moving average are rather puny.

For example, we'll drop -17 Monday. Tuesday is a positive reading. Wednesday is -320, and that is the biggest negative number to be dropped next week.

As a reminder, to be oversold, a long string of negative numbers must be dropped. For a good oversold reading, a long string of "big" negative numbers needs to be dropped. Next week's numbers are not "big."

The next thing to notice is that the oscillator has now made a lower low. Remember, an oversold reading usually leads to an oversold rally, but it takes positive divergences (i.e., a higher low in the oscillator) to get a rally with some staying power. Just notice the three lows of last spring and summer, with the latter two being higher lows. That is what a positive divergence looks like. What we have now is at best an upcoming oversold reading.

Then there's the put/call ratio. For weeks on end, I put the put/call ratio on the bullish side of the ledger, but last Thursday, I warned that at some point, a constantly high put/call ratio becomes a negative, not a positive. On Monday, I showed the chart of the index put/call ratio's 21-day moving average as it surged over 180%, which turned it from bullish to bearish.

However, for the past few days, I haven't mentioned the put/call ratio, despite its higher readings. For each of the past seven trading days, the total put/call ratio has been over 100%. I use a 10-day moving average on the total put/call ratio for shorter-term moves. That means within three trading days, this indicator is likely to peak.

Heading into last Memorial Day, the put/call ratio had nine consecutive days of 100% or greater readings. The market rallied, but it lasted only a few days before heading back down again. To me, this confirms that the upcoming oversold reading isn't a great one. These two indicators say that we should get some kind of rally next week, but it probably won't last long.

Away from stocks, has anyone noticed that oil has rallied a lot lately? Oh, it's been quiet in its rise, but yesterday's high was $62.49. I had been looking for something around $62.50, I'd say it's in the area now.

I wouldn't look for much more upside on oil now and would consider it vulnerable to a move back down below $60.

Also on the commodity side, it's time to revisit silver, which I last covered on Feb. 16. At the time, I said I'd like to see silver break out, get people excited and give the gain right back. That is exactly what it has done, yet I haven't seen anyone discuss its collapse. I believe silver is due to test that $12.50-$13 level now.

Overbought/Oversold Oscillator

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