This Indicator Shows the Market May Soon Bounce

Published August 10, 2017 - 7:30 AM

Not even the threat of nuclear war could knock the S&P 500 out of its trading range.

The S&P 500 closed yesterday at 2474 – inside the 2470-2478 closing range of the past three weeks. Yes, the index was as low as 2465 earlier in the session. But just as the bulls couldn’t make Tuesday’s intraday breakout stick, the bears were equally un-gummy on yesterday’s breakdown.

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In the meantime, several technical indicators are already approaching oversold levels. For example, look at the following charts of the McClellan Oscillators for the New York Stock Exchange and the NASDAQ…

The NYMO and NAMO measure overbought and oversold conditions in the stock market. Readings of more than 60 indicate severe overbought conditions, and often precede large declines. Readings below -60 display extreme oversold conditions, and usually lead to strong bounces in stock prices.

These are the sorts of readings we see at the end of short-term decline phases. And they often mark the beginnings of a stock market bounce.

As of yesterday’s close, the NYMO and NAMO were at -50 and -45 respectively. That’s not quite the -60 level where we start looking for a bounce. But it won’t take much more of a decline in either of these indicators to get us there.

I mentioned yesterday that if the S&P 500 were to close below its 9-day exponential moving average at 2474, then the most likely downside target would be the 50-day moving average at 2447. It’s hard to imagine a much larger decline than that when the McClellan Oscillators are already nearing oversold conditions.

Best regards and good trading,

Jeff Clark

P.S. Have you ever used McClellan Oscillators in your own trading? Let me know of any success you’ve had with this indicator—or any other questions, suggestions, or ideas—right here.

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