OVERSOLD & SUPPORT
Downside volatility has increased in early 2018, as discussed in recent Macroeconomic and Technical webinars and research updates. While statistically measured “oversold/fear” levels are close at hand, it is important to distinguish between an equity market “Low” and an equity market “Bottom.”
A Low is a function of price only and is usually accompanied by high-volume selling. Consistent with this and the DJIA’s 4.62 percent decline yesterday, declining volume on the NYSE was 97 percent of total advancing and declining volume, the second consecutive day this relationship was over 90 percent. Also, declining volume on the NYSE exceeded upside volume by a massive 31-to-1 ratio yesterday. One sign that a Low has been established, following volume readings such as described, is strong demand for stocks shows up. A very strong ratio of NYSE advancing volume over declining volume makes this evident.
Once a Low has been recorded, it takes time before a Bottom develops. A Bottom is a function of both price and time and usually includes some type of “Low-Rally-Retest” sequence. When looking at a chart, this sequence usually resembles something akin to a W.
INDICATORS AT OR NEAR OVERSOLD/FEAR LEVELS
In my opinion, when the equity market is in the midst of algorithmic and index fund trading—which has been the case over the past few days—the selling pressure is not necessarily a reflection of the underlying economic and fundamental backdrop. During these types of periods, I identify support levels in terms of ranges or areas, not at 100 percent specific levels.
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies.
Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management
—Written 02.05.2018. Chart sources: Stockcharts.com.
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