Markets Excessively Oversold

The seeds of a bottom are being planted right now

By Paul Cherney

This year's Stock Trader's Almanac has a study on price performance in the DJIA in Triple Witch weeks, it is on Page 40 of the year 2002 edition. Here are some of the bullet points:

• Triple Witches became more bullish in the last decade except for the June quarter.

• Since 1991, of 14 down Triple Witch Weeks, 12 following weeks were also down. This is the opposite pattern than the one produced during the 80's when there were 13 down Triple Witch Weeks followed by 12 up weeks.

• The DJIA closed this year's Triple Witch Week with a loss.

• The historical performance of the S&P 500 in years when it has lost more than 5% from the end of March to the end of May is usually lower still in the second half of the month. The study I performed generated historical odds (on data since 1970) of 4 in 5 that the S&P 500 will finish the month of June below 1007.27.

The seeds of a bottom are being planted right now. I have weekly indicators based on the S&P 500 that are at oversold levels seen at or near major lows over the past 14 years, and for this reason I do not think that there is major and long-lasting downside risk. The last time these weekly indicators (which combine price change with volume measures) hit these levels were September, 2001, March, 2001, October, 1990, and December, 1987. Because this indicator is based on weekly data it will not pinpoint to the day the turn, but we are within 10 trade days of a low which should launch higher prices. In reviewing daily price action near these excessively oversold readings, I know that there can be some volatility and chopppy up and down action and I a reall6y do not have the evidence to say that the lows are in already, but they are near and they are probably not far from the S&P 500's close today.

I have many indicators at levels which are usually at/near significant bottoms. I look at the Call open Interest divided by the Put Open Interest for the OEX, That has recently moved above the 1.30 level and on (09/18/01, just 3 days ahead of the Sept 21 reversal, this inicator hit a level of 1.39.

Sentiment indicators, including Investor's Intelligence %Bulls and %Bears are also very close to reproducing the signal they gave the week of September 21, 2001. It was then they %Bearws bbecame larger than the %Bulls. There will be new weekly poll produced Wednesday and I would not be surprised (especially after this past week's declines) to see that %Bears had surpassed % Bulls in the newest poll.

I think if there is a drop on Monday, buyers will come out of the woodwork. If the VIX can drop under 29.01 intraday, it should coincide with a rebound in prices. Because of the nature of the psychology of the marketplace right now, I do not think that the first lift from lows can generate a "never look back" trend higher for the markets. I still expect to see a jagged low and a retest of that low with 15 trade days (unless something else technically presents itself).

The Nasdaq has immediate resistance 1449 to 1491, with a focus 1480-1486. The next resistance is 1519-1538.36 then 1554-1595 with a focus of resistance 1560-1570. The next thick resistance (above 1595) is 1620-1654.

The S&P 500 has immediate resistance 994-1005.58 then 1010-1019 then 1025.93-1039.09. There is a focus of resistance 1032-1037.80. There is thick price traffic 1039-1047. The next resistance is 1065-1088.

Immediate Nasdaq support is all of the price range from Sept 21, 2001. The Nasdaq has additional support 1400-1200. I do not think the index (even if it sold off horribly, could manage more than one close below 1387.

Immediate intraday support for the S&P 500 is the entire price range from Sept. 21, 2001. I do not think the S&P 500 could have more than one close below 944.75.

September 21, 2001 price ranges are:

• S&P 500 intraday high 984.54, intraday low 944.75, close 965.80

• Nasdaq intraday high 1454.04, intraday low 1387.06, close 1423.19

Cherney is chief market analyst for Standard & Poor's

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