The stock market bears have been calling for this current pullback for what seems like years. Now the bulls are looking for the elusive bounce that "holds" and signals another move higher in the market. After the close on Friday, I noted the oversold market conditions and a potential bounce that may follow. Three days into this potential "bounce" scenario, the market has failed to cooperate. This shows how difficult it is to time the market and find market bottoms. Nonetheless, the bears have had years predicting a correction, so for one calling a bounce for a few days (and being wrong) should be given a little leeway.
After today's trading action, with the waterfall decline near the close, much technical damage was done to the market. On the positive side, market conditions are at extreme oversold levels. As the below chart shows, the relative strength index (RSI) reached an oversold level of 16.77. The only lower level for the RSI over the past five years occurred in August 2011 when the RSI reached 16.46 and was followed by a sustained bull market run.
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| From The Blog of HORAN Capital Advisors |
The percentage of S&P 500 stocks trading above their 50 day and 200 day moving averages continue to indicate oversold market levels as noted in the two charts below.
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| From The Blog of HORAN Capital Advisors |
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| From The Blog of HORAN Capital Advisors |
A lower open in the morning and a market recovery into the close would be a positive sign for the market near term. As the below chart shows, if the market would open down and find support in the 1850-1855 area a more sustained move higher would be a high a probability.
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| From The Blog of HORAN Capital Advisors |
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