Oversold Does Not Mean Buy

02/13/2018 2:07 pm EST

Focus: STOCKS

Lawrence McMillan

Founder and President, McMillan Analysis Corporation

The oversold conditions that have built up should eventually be able to generate a sharp, but short-lived rally back to and slightly above the declining 20-day moving average, says technical expert and options specialist Larry McMillan.

In just nine trading days, S&P 500 (SPX) is down 9.0% and has lost 291 points. That’s a lot of distance in a short time.

This decline has rolled nearly every intermediate term indicator into a bearish status, if it wasn’t there already. It has also caused some massive oversold conditions to appear. But remember, "Oversold does not mean buy," and that is a lesson that is harshly taught every time the market sells off like this.

Right now there is resistance at 2727 Tuesday's high. Support has yet to be determined, as Thursday's heavy decline blew right through Monday’s lows. We have been saying for some time that the market advanced so swiftly in 2017 that there were no support areas left in its wake.

There should be some support in the 2500 area, from September, and then perhaps more in the 2420-2460 area from June- July, but those are certainly tentative. Put-call ratios have now turned sharply higher, and are clearly on sell signals. They will remain a Sell as long as they continue to rise.

Market breadth was terrible, and both breadth oscillators are on sell signals and are in deeply oversold territory -- although we’ve seen them much more oversold than this.

Volatility has been rising rapidly, and is one of the indicators that is warning that this decline might be longer than the now-wounded bulls expect. CBOE Volatility Index (VIX) is in a uptrend, and that is negative for stocks.

From the intermediate-term standpoint, everything is quite negative:

  • the SPX chart is declining and the 20-day moving average is trending
  • equity-only put-call ratios are racing higher on their charts daily;
  • market breadth oscillators are on sell signals;
  • and VIX is trending higher.

Those are all negatives. Countering that, to some extent, are the oversold conditions that have built up. They should eventually be able to generate a sharp, but short-lived rally back to and

slightly above the declining 20-day moving average.

Learn more about Larry McMillan and options strategy at http://www.optionstrategist.com/

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