"TAP não sobrevive se se mantiver pública", garante Pinto Luz

[Ulisses Pereira]

"Peering Out From the Bear Cave"

By Helene Meisler
RealMoney.com Contributor
1/29/2010 6:59 AM EST

I know everyone fusses over the level of 1080 or 1085 on the S&P 500. And sure, it's important. But remember a week ago when everyone said that a 4 standard deviation move in the CBOE Volatility Index meant a rally was imminent? Great rally we had from that 4 standard deviation move, eh?

Nothing is written in stone. Markets are meant to fool the majority. So big deal, we break 1080. What if we break 1080, fly down to 1070, and return to 1080 in a heartbeat? What good would it do you to fret over 1080? I think it's best not to fret over certain levels.

For months on end I have complained that the lack of a correction in the market was bearish. For months I was wrong. And so now we see what happens when the market is held up for whatever reason and not allowed to correct.

But I also believe that markets do not go in a straight line. And I believe the market is heading toward an oversold reading. Below is the chart I show here each day. The first thing you might notice is the position of the oscillator, down near where it was at the October low.


The next thing I want to note is that for the past 10 days the market has had a very negative bias. Since this oscillator is the 10-day moving average of the advance/decline line we look back 10 days ago to see the numbers we are dropping. When we drop a long string of positive numbers we're overbought; when we drop a long string of negative numbers we're oversold. Take a look at the string of numbers we will start dropping on Monday.

What you can see here is that seven out of nine trading days finds us dropping negative readings and many of them are quite negative (four digits instead of two or three). No we don't have to rally since we know that truly weak markets get oversold and stay there, but I say the likelihood is high. After all next week is early in the month and even in the darkest days of 2008 and early 2009 we saw at least one up day during the first few trading days of the month.

I didn't like the fact that the put/call ratio was so low Thursday, but just from the anecdotal evidence around me I feel as though the bear cave I have been in is getting pretty crowded. In fact, I have a terrific cartoon someone sent me in the summer of 1987 (I don' know where it came from) that shows a bunch of bears in a cave with a salesman selling stocks showing up at the door. In the cartoon the bears say, "Bears? There are no bears here, just us corrections."

This upcoming oversold condition tells me it's time to take a breather from the bear cave and look for an oversold rally next week. Or maybe you want to call it a correction from the down wave we've been in. Heck, even the groundhog is scheduled to come out next week! "

(in www.realmoney.com)