More Evidence of an Oversold Rally

The OEX put/call ratio is heading down, as it did in the previous bear-market rallies.
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Well, if yesterday wasn't fascinating! The market players did what they were supposed to do: They broke 'em -- at least over on the

S&P 500

.

There was that 975 level. There were all of those folks who chattered about the head-and-shoulders top in the S&P with a breakdown level around 975. So we broke that level and whooshed. Why? Well, that's the way it's supposed to work in a correction: We're supposed to break something and shake out the weak holders, and then we can rally. That's exactly what happened.

The market is still oversold. The put/call ratio is still high. The same thing happened with the put/call ratio in May. It wasn't until we went into that speculative rally in the first week of June that the put/call ratio finally fell. And that meant folks had finally stopped fighting the rally.

Since early June, the ratio stayed low for the most part, with readings in the 50s, 60s and 70s. But last week, we began to see some readings creeping into the 80s, and as we got to Friday and into this week, the ratio came back into the 90s.

So is this like the May low? Well, not exactly. The difference in the put/call readings between then and now is the S&P 100, or OEX. Back in May, I

wrote that the OEX put/call ratio remained quite high then, as well. That had been a big difference between this rally and the previous bear-market rallies: In the previous rallies, we'd seen the 10-day moving average of the OEX put/call ratio fall, but in this rally, we had seen it rise.

And now? It's heading down, as it did in the previous bear-market rallies. After having a high reading on Friday of 1.89, it has come down to a relatively low 1.12 Tuesday. If this trend continues, then this rally will turn into what I expect it to be: an oversold rally that is all part of building a top.

Overbought/Oversold Oscillators

For more explanation of these indicators, 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.