Two Indications of Oversold and Overbought Market

As I have mentioned several times in my posts, I was cautiously bullish about the current rally. However, two indicators have given me pause regarding the current trend: the McClellan Oscillator and the “Percentage of Stocks Above Their 50 Day Moving Average.”

In regards to the McClellan Oscillator, readings above 100 indicate an oversold market. Right now, it stands at 127! As we learned recently, a market can stay oversold/overbought for some time. But, it definitely is a shot across the bow that may indicate the primary downtrend will soon resume.

click to enlarge

The other indicator to consider is the percentage of stocks above their 50 day moving average. When 80% of stocks on an index are above the 50 day moving average, the market has become too bullish and overbought. It now stands at 83.48.

Remember: Neither of these indicators is a precise timing tool! They should be used to gauge general market fitness.

The S and P 500 chart also advises caution. A quick glance shows that the current trend may be topping as the progression upward slows and volume increases.

Hopefully, a move downward will correct these overbought conditions and the trend upward (or even sideways) can resume. For the S and P 500, support is currently at 900 and the 50 day moving average at 887.

Comments

[User 332756:]

you said "In regards to the McClellan Oscillator, readings above 100 indicate an oversold market."

Isn't the consensus that McClellan Oscillator readings above 100 indicate an OVERBOUGHT market?

Jan 07 09:51 AM

[Roger Knights:]

There's a typo in "readings above 100 indicate an oversold market." "Oversold" should read "overbought."

Jan 07 06:20 PM

[y3115y:]

Tuesday: SPX went over the resistant line, nery bullish.

Wednesday, SPX did not go up, but brought down by bad un employment data. The chart is not working if there is a major economic or political news.

Jan 08 10:17 AM

[Kunst:]

Stocks are rising on expectations that the economy will improve a few months from now. I think that is premature. These indicators tell what is happening now, not what is coming next.

Jan 08 01:42 PM