A Bad Oversold Condition

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On Monday, the S&P 500 broke a three-day losing streak with a rally of 0.5%. Breadth was positive by a bit better than 3:2 and up volume outpaced down volume by a 5:4 margin. However, the internals were not entirely positive. The overall action resulted in an inside day (a lower high and higher low than Friday’s action) and total volume fell by 28%. Moreover, the daily Coppock Curve is negative for every one of the 24 S&P industry groups.

S&P 500 Hourly

Last week’s decline resulted in a “bad oversold” condition. This is a confirming situation that typically results in a rally (that helps to work off the oversold reading), followed by renewed weakness that establishes one or more lower lows. As those lows occur, we begin to look for positive divergence.

As an example of the confirming bad oversold condition, Friday’s 5.1% three-day rate of change was the lowest since March (which was a positive divergence when compared to October and November 2008). Similarly, the hourly Coppock Curve reached its lowest reading since October (that’s a lot of hours).

At the same time, we can make a case that the DJIA has now achieved five waves down from last week’s high. We have to use a fifth wave “failure” to achieve that count, but it is certainly doable. Last week, we could not say that for the DJIA. Last week we could (did and do) count five waves down on the S&P, but not for the DJIA. So the DJIA has now caught up with the S&P in that regard.

That said, there is some chatter that the five wave pattern is a “C” wave. But the breach of support, increased down volume, weak momentum, and trend line breaks suggests that the decline is the beginning of something, not the end.

Next support exists at 1086-1085. In turn, a break of that range would, at a minimum, lock in the rally from the July low (and probably the March low) as a complete pattern.

As for resistance, 1105-1116 is the fourth wave of prior degree within the five-wave decline from last week’s highs; this is a typical resistance area. (Monday’s high was 1103.) Second resistance is the 1133-1136 breakdown point from the 1150 bear market rally high.