Grossly Oversold Market Due for a Bounce

The Dow ended a meandering day of trading with a sudden, last-minute spurt of buying that saved it from a triple-digit loss. Nevertheless, it was the senior index’s sixth decline in seven sessions and over 8% below those lofty days of late September.

Worse-than-expected economic numbers had a negative impact on trading with last week’s initial jobless claims leading the list at 439,000 versus an expectation of 388,000. The Philly Fed survey fell to -10.7 for November while economists looked for a flat reading.

At the close, the Dow Jones Industrial Average was off 29 points at 12,542, the S&P 500 fell 2 points to 1,353, and the Nasdaq lost 10 points at 2,837. The NYSE traded 776 million shares and the Nasdaq crossed 464 million. Decliners outpaced advancers on the Big Board by 2-to-1 and by 1.6-to-1 on the Nasdaq.

Nasdaq Chart
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Trade of the Day Chart Key

The chart shows in graphic detail the Nasdaq’s plunge from the September high of 3,197 to Thursday’s close at 2,837, a loss of 11.3%. The astounding feature of the chart is that it fell with so few consolidations that it is almost a straight line decline. There was but one solid bounce, and that was from the 200-day moving average, a feature that in late May put a halt to a plunge from the March high. The Relative Strength Index (RSI) is now very oversold and almost as low as May’s reading.

UUP Chart
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The PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) is in a broad advance that began in July of last year. The short-term inverse impact on U.S. stocks was strongly evident when it rallied from its September/October double-bottom, which coincides with the September/October top and then plunge on the Nasdaq.

Currently, UUP is looking somewhat exhausted as it curls away from its 200-day moving average. Note that the curl down began when it closed the downward gap of early September. Gaps act like magnets, and the two on this chart illustrate their importance to chartists.

There is an open gap that was made at $21.94 to $22.03 as it sliced upward through its 50-day moving average (blue line). This gap plus the oversold RSI on the Nasdaq chart tell us that stocks are very oversold and the likelihood of a sharp rally is high.

Conclusion: The market is now grossly oversold and due for a technical bounce. This may be trumped by further delays in reaching an agreement on the fiscal cliff, but more likely will coincide with a positive announcement that causes panic in the ranks of short sellers and a rush to cover their positions. Very close stop-loss orders should be entered by new short sellers since the chances of a rally are high.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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