Wednesday, January 16, 2008

Is the NAZ oversold yet?



This is an odd little indicator that measures how many stocks in the index are above their 50 day moving average. As negative as the market has been, the NASDAQ may be approaching oversold conditions with only 20% above their 50 MA.

This tool is extremely good in determining oversold conditions during a bull market with the 200 day moving average on the upslope, but the indicator breaks down as the market turns bearish. In other words, at the short term market lows of August and November, the indicator worked beautifully in picking the bottom at oversold levels, but now the 50 day MA line is in a sharper down slope and even though the number of stocks below this number is increasing rapidly the index is declining further.

The question remains, is the market oversold?

The short answer is yes, especially the NASDAQ, but the longer answer is that market sentiment is so lousy that picking the bottom may be very tricky. The NYSE is less clear on this issue; the financials, if this indicator were available, may be the most oversold at this juncture but the 50 day MA is in too sharp a decline to take that bet.


If stocks must be bought at this juncture, I'd stick to lower risk big cap techs: MSFT, ORCL, IGM. Big cap financials like JPM, WB and GS seem okay in anticipation of a rate cut, but that bet is more specious. Regional banks and anything having to do with consumer spending, especially restaurants, need to be sold yesterday. Take your losses now. And don't even get me going on emerging markets... US consumers are running out of credit to buy those cheap plastic doo-hickeys and tainted toys from the Far East... I'm sticking with my Ultrashort China ETF (FXP).



7 comments:

Eric said...

What is interesting about that chart, to me, is that I would expect the RSI to get above the december move, in this move.

Eric said...

sorry I needed comments to be mailed to me

Eric said...

Which is why I just clicked the check box......

and I like a fool had to explain that all.

Tony said...

The RSI remains low because the stocks in the index are under distribution, and the market sell-off over the past 15 trading sessions has exacerbated the trend.

The oversold condition is still not achieved for the NAZ to the degree that a trader should jump in with both feet. Patience is in order until a better capitulation day.

Failing to catch the proverbial falling knife is the greatest risk, so I would mitigate any long position with a short position such as FXP or selling TSM short.

Today, that trade worked well: Long JPM or ORCL, short China with FXP. Tomorrow, who knows?

With the US market bouncing at 14 month lows, I think the long/short strategy is safest right now. A recession will murder the emerging markets, and that is not priced in right now for some reason.

Eric said...

As you know I follow Elliot wave theory agressivly. Which means that the RSI on this downturn has to exceed the RSI in the last pull back...

That was what I was getting at....

I actually just looked at my charts, and the rsi from that move last week, was greater than the december...
What is interesting is that I'm more sensing a bounce followed by another break down....

The other thing, in a bottoming process, the leadership will bottom first, then other stuff will follow.

Cheers.

I have a hard time sitting around waiting for a 30 point decline from the august lows to a lower low. When we get 30 points a few times a day just in volitility.

Tony said...

Eric,
I am not familiar with the Elliot wave mechanics, except for the allusions in your blog. It sounds interesting-- I'm meaning to pursue it more.

When you look at RSI, are you referring to the nominal value or the slope of the line?

Eric said...

Nominal.

Roughly, things move in 3 impulse waves with 2 corrections in between.

Theory would be, that we sold off in November, as a first wave, followed by the December correction/rally(wave 2)... now we have this sell off now is 3rd wave... going on now. We should get a 4th wave Rally... followed by 5th wave capitulation.

The Terrible thing is that a first wave rally and second wave correction.... Can look like a "correction of trend" and a Continuation of trend.

it also has a nasty way of not being predictive, since smaller waves can lead to larger ones...

Key is that 3rd waves are larger than the first or 5th...

Based on that The RSI now should be larger than November...
Funny thing is the VIX should be Too... Which has me very worried. about this move. Since the Third wave is larger than the 5th or first...

But Like I say "Chart Astrology"... I hate being long this market. Every time I'm long I'm sure it's going to crash.

But to be honest, I'm doubtful in a 5th wave move the vix or the RSI will get as high.