Tricky Tuesday – When the World is Running Down

When the world is running down
You make the best of what's still around – Police

This is the chart we'll be watching today:

It's Dave Fry's McClellan Oscillator and -100 is very, very oversold so we can expect some kind of bounce for any silly reason and what we'll be watching closely is how fast a move up works off the oversold condition.  If, for example, we come back 13 points on the S&P (weak bounce) to 1,658 and the Ocillator moves all the way back to 0 (neutral) - then the market is likely due for much more pain ahead.  

It's not enough to just stare at the charts – you need to understand HOW they are constructed and what factors affect them.  On the left is the NYSE Summation Index, sort of a longer-term oscillator and it's showing we're not even oversold yet.  This makes it very likely that any bounce we get today will be short-lived and I've already sent out an Alert to our Members (and a tweet) to prepare for stormy weather ahead.  

I won't get into the macros again – you can follow the links for that – since I sent out the Alert we had a beat from Best Buy (BBY) and Home Depot beat and raised guidance so that's given us an excuse to bounce higher but also gives us a chance to pick up some inexpensive hedges but, first, our target levels.

Per our 5% Rule™, we look for weak (20%) and strong (40%) bounces off 1.25%, 2.5% or 5% market pullbacks.  The S&P, for example, fell from 1,710 to 1,645 and that's 65 points or 3.8% or close enough to 3.75% to make us look at the legs and leg one was 25 points over 8 days, to 1,685, and leg 2 was 40 points over the last 3 days – so we've been accellerating to the downside.  

At the 3.75% line, we expect a 20% retrace as "normal" and not a break of the trend.  A 40% retrace (strong bounce) is a sign of possible…