​Stocks Try to Bounce from Deeply Oversold Levels

Adam Sarhan |

The major indices ended lower last week but near their weekly highs, which suggests the market may finally bounce from deeply oversold levels. This appears to be another short term low for stocks (Not "the" low, just "a" low). The conditions are ripe for stocks to rally a bit as they work off their deeply oversold levels. Once again, the bulls showed up and defended important support for the S&P 500 (1810-1820 area). What we saw last week was another "buy tail," which is a technical term for a market opening lower and closing higher (or near the highs).

We have seen this pattern a few times before and the pattern tends to set the stage for a near term rally. That's the short term outlook. Meanwhile, the intermediate and long term outlook still remain bleak. First, we are still operating with the notion that we are in the early stages of a new bear market for stocks so we have to be very selective moving forward. Second, it is important to note that, in bear markets, surprises happen to the downside. Third, we have to keep in mind that global central banks love interfering with markets and have distorted the playing field for years. Any strong intervention may change the playing field and lead to a stronger bounce. Until that occurs, the sellers remain in clear control. We feel it is just a matter of time until the major indices fall 20% from their 2015 highs which officially defines a bear market. Several important areas of the market are already in a bear market (defined by a decline of 20% or more from a recent high) which means it is just a matter of time until the major indices play catch up to the downside. These are some of the important areas that are already in bear market territory: Commodities, The Small Cap Russell 2000 ($IWM), Transports, Biotechs, Retail, Junk Bonds, Materials, just to name a few.

Monday-Wednesday's Action: Stocks Try to Bounce

It was a sea of red on Wall Street. Stocks fell hard on Monday, as sellers remain in clear control of the market. The damage was widespread and continued from last week. The Nasdaq Composite and Nasdaq 100 broke down below support of their bearish flag patterns (highlighted last week). The Small-Cap Russell 200 also broke below January's low which is not ideal for the bulls. Oil prices fell over 3.00% on Monday, and that continues to hurt sentiment. There was virtually no meaningful economic data on Monday from the U.S. The only thing noteworthy on the economic front was that India, the world's third largest economy, said it's economy grew by +7.3% in Q4 2015, making it one of the world's fastest growing economies. China's GDP slowed to +6.8% in the same period. Meanwhile, U.S. GDP grew by 0.7%, missing estimates for 0.90%.

The major indices ended near their intra-day highs for the second straight day which may be a sign that the market is due to bounce a little. Clearly, the market is deeply oversold and way overdue to bounce at this point. Shortly after the open, the market tried to rally but sellers showed up and quickly sent stocks lower. Then in the afternoon, stocks tried to turn higher and overall it was just a lot of jello moving on a shaky plate. For all of 2016, rallies on Wall Street are lasting a few hours which is not a healthy sign. The inability for the market to bounce clearly illustrates how weak the market is right now and tells you everything you need to know. In other news, oil prices fell 5.00% and is once again trading in the high $20.

The market was relatively quiet on Wednesday as investors digested the latest round of lackluster earnings data and Janet Yellen spent most of the day testifying on Capitol Hill. Disney ($DIS) and Solar City ($SCTY) both fell hard after reporting disappointing results. Janet Yellen spent the day on Capitol Hill and basically said nothing. She said she understands there are threats to the global economy but she did not take more rate hikes off the table. The market remains deeply oversold and the inability to bounce speaks volumes to how weak the intermediate and longer term trend is right now.

Thursday-Friday's Action: Stocks Bounce After OPEC News

Before Thursday's open, futures and most global markets, were down big as another wave of selling hit stocks. Overnight, Sweden's Central Bank surprised markets and cut its main repo rate further into negative territory. Sweden lowered its rate to negative -0.5%, from -0.35%. Crude oil fell to $26/barrel and gold soared to a fresh 1 year high. At one point, the Dow Fell over 400 Points and the S&P 500 briefly undercut Jan 20, 2016's low of 1812 before buyers showed up and defended stocks. In the afternoon, news spread from OPEC that they may be near a deal to cut production which helped oil prices spike higher. Needless to say, stocks are deeply oversold and way overdue to bounce at this point. Stocks rallied nicely on Friday as oil vaulted 12% and bounced from deeply oversold levels.

Market Outlook: A Big Top

From where we sit, this aging bull market is over or on its last breath. The last two major bull markets ended shortly after their fifth anniversary; 1994-2000 & 2002-Oct 2007. The market is deeply oversold so keep in mind the strongest rallies in history occur during bear markets (a.k.a bull traps). As always, keep your losses small and never argue with the tape. If you want help with the market, contact Adam or consider joining FindLeadingStocks.com.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Symbol Name Price Change % Volume
DIS Walt Disney Company (The) 94.02 0.53 0.57 6,648,210
SCTY SolarCity Corporation 20.64 0.65 3.25 4,765,839


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