Monday, May 24, 2010

Of bears and bulls, McClellan Oscillator and Oversold bounces

After their impressive comeback in the last few minutes of trading on Friday, the table was all set up for bulls to bounce back today. I, like I believe many others, thought we would start off strong today before the bears would fade any gap and eventually prevail. Well, I got the second part of that right dear readers, didn't I? All the bulls had to do was show up. But Alas! As you and me now know very well dear readers, blessed as we are with excellent hindsight, that the bulls forgot to turn up today. The bears waited patiently for them for most of the day, like good hosts should do (for surely, bears own the house now), but eventually decided to carry on with their party without the bulls.

Let's have a look at how the S&P chart looks after today. The February lows remain an obvious area of support and one can also expect some support at 1160 levels. 

But despite the bears' obvious domination, I would still not recommend going short here dear readers. And here is why. Both NYSE and NASDAQ McClellan Oscillators, indicators which I have found very reliable in calling tops and bottoms in the past, are at extremely oversold levels here. 

Does that mean a bounce will happen tomorrow? No! Not at all dear readers. An oversold market can easily become more oversold. All it means that the odds are in favor of a bounce here. The market always work in probabilities dear readers, never in certainties. And so does life. But I am sure you already know that. I think we will see higher lows being made in both these oscillators.

As for individual stocks, Gold made a very nice move up today and the intraday action was very encouraging. NGD is my usual gold play. And like I wrote earlier, I got into DLTR today, which showed excellent action for most of the day, before giving in to the market action close to the end. Also, I would recommend keeping an eye on PAL here. This is a gut call here coming from watching the action on tape today. The chart is ugly but I think something might be brewing here.

And that's all from me for today dear readers. Take care and good luck!


The Dabbler said...

McClellans measure the momentum of Advance/Decline ratio on the respective indices. The oscillator is a faster moving average of the A/D line which moves over a longer (slower moving average). If the shorter moving average crosses below the longer, the oscillator becomes negative. The oscillator measures momentum (the delta in the market breadth), not overbought/oversold conditions. The fact that it is very low does not necessarily mean that it is going to rebound in the near future.

There are times when you would be better off looking at support and resistance (I use Point and Figure charts). My Charts show that if the S&P closes below around 1050, its a free fall to 997. At this point, it doesn't matter whether the market is over sold -- the market determines what the settlement price is.

Hope this can help.

positiontrader said...

Thanks for the comment Dabbler. You are right about the McClellan Oscillator being a breadth oscillator, but surely the breadth of the market can be used to determine overbought/oversold conditions. I generally follow support and resistance levels too but turn to the McClellan Oscillator in extreme market conditions such as these. It works rather well in my experience, and I recommend plotting the oscillator against the S&P and NASDAQ to verify that.Of course, it is not perfect but it gets the job done, most of the times at least.