How the Nasdaq Oscillator Can Reach Oversold - TheStreet

How the Nasdaq Oscillator Can Reach Oversold

For the index to regain the lead, it may need to retest last week's lows with a higher low in the oscillator.
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OK, I'm not even going to complain about Friday's rally. Instead, I'm going to talk about what it would take to get the

Nasdaq

to reach an oversold condition.

In last Monday's

column, I pointed out that the Nasdaq has so far outperformed the

S&P 500

that it was time for that relationship to change, and that's exactly what it did on Thursday and Friday. So, now what will it take to get the Nasdaq back in an oversold position?

We need to look at the absolute numbers first. Because my oscillator is a 10-day moving average of the advance/decline line, we must look at the numbers we're "dropping" to see how the oscillator might act going forward. For the current week, four of the five days that we're dropping are positive numbers. (Three are big positive ones.) If we look at next week, we'll be dropping a few negative days from last week's decline, beginning Tuesday, July 29.

So, let's start with the premise that the Nasdaq can rally, but the oscillator says it's unlikely to get a good oversold reading anytime this week. Then let's remember that some of the best (although not all) oversold rallies come when the Nasdaq's oscillator has had a chance not only to get sufficiently oversold, but also to test that oversold reading.

On the charts above, I've marked points A and B to show how the Nasdaq retested the same level in March that it saw in February, but the oscillator also retested and showed a higher low, giving us a positive divergence as well as a good oversold reading. Then I've marked points C and D to show the late June twin lows on the Nasdaq, which coincided with a similar showing on the oscillator.

Right now, the oscillator hasn't even reached an oversold reading and is still milling around above the zero line. Friday's action lifted the oscillator off its Thursday's low, but that's about all it did.

If you're bullish and waiting for the Nasdaq to show some signs of regaining the lead, you want to see the Nasdaq come down and retest last week's lows with a higher low in the oscillator. As the oscillator looks like it won't be able to reach an oversold reading for about another week, Friday's action seems too soon for that.

Overbought/Oversold Oscillator

For more explanation of this indicator, check out The Chartist's

primer.

Helene Meisler, based in Shanghai, 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

Helene Meisler.