Monthly Archives: January 2016

Last week’s erratic price action played out in a defined range and unexpectedly helped to stabilize the markets. Friday’s strong session was the icing on the cake and transformed the weekly and monthly candles from neutral to bullish.

Early in the week we noted that the stochastic oscillator on the daily S&P 500 chart, which we have been following closely for several months, gave a bullish signal. The oscillator is now crossing its centerline and the next level of technical resistance is the former support-turned-resistance of the declining channel, currently in the 1970 area.

The action over the last weeks formed two hammer candles in an important area of previous support. Stochastics on this time frame is just making a bullish crossover and exiting an oversold condition. The relative strength index is improving but remains under its centerline, reflecting a lesser degree of positive momentum, and the accumulation/distribution is back above its 21 period average after briefly dipping below it.

Finally, the potentially positive momentum shifts seen on the faster timeframes has yet to show up on the monthly readings, but a bullish hammer candle formed adding further significance to the 1875 to 1900 area and the A/D line continues to track above its signal line.

The technical indications suggest that the bounce has more room to run, but it will be interesting to see how confidently the broader market responds to its first level of resistance.

This is another stochastic oscillator update. We have been following the overbought and oversold signals on this indicator for months and it has reliably identified shifts in the short term trend. It’s made a bullish crossover and is moving out of an oversold condition, signaling a potential short term move higher.

I have been highlighting the efficiency of the stochastic oscillator in identifying short-term trend reversals in the S&P 500 index for the last several months. When the oscillator makes a crossover in an overbought or oversold condition and then moves out of that zone, the index is likely to see several days of countertrend action.

Currently, the index is testing the August and September lows and is attempting to stage a bounce at this key technical support level. The stochastic oscillator has made a bullish crossover and is rising but is still in an oversold condition.

The recent retest of the support line of the declining channel on the S&P 500 chart needed to hold long enough for the stochastic oscillator to readjust and turn upward, in order to duplicate the bullish reversal signals it has been sending in the past. But the retest failed dramatically, taking the index back down through the support line of the channel pattern and further suppressing the stochastic oscillator.

The oscillator is clearly oversold and, as I have been highlighting for some time – when the oscillator makes a crossover in an overbought or oversold zone and then moves out of that zone, it has signaled short term reversals. That said, the stochastic oscillator is a bounded oscillator and can stay in an extreme condition for an extended period of time.

One other indication that the S&P 500 is oversold and due for a bounce is the number of stocks that are above their 50 day moving average. The chart shows that only 13% of the stocks in the index are above that average, which is back down to last year’s September/October readings.

At this point, patience is required along with a bullish stochastic signal and an identifiable candle reversal pattern.