Short-Term Measures Approach "Washout" Territory

JC Parets
March 2, 2020

From the desk of Tom Bruni @BruniCharting

Today JC discussed our March playbook for Members and outlined some areas we'd be looking for a bounce with well-defined risk and others that we want to be completely avoiding.

I wanted to share a few breadth measures to provide context around the recent decline and see if they offer any clues around what's next.

First, let's take a look at the flip side of the number of stocks hitting overbought conditions that we looked at last week. Here we're looking at the number of Russell 3000 stocks that got oversold, spiking to 54%, which is just slightly lower than where it peaked in December 2018.

Typically in this measure, we look for some sort of divergence on a retest to signal that fewer stocks are making new lows with the index, however, in rare cases like December 2018 when extreme levels are hit we don't get that. We have to keep an open mind to both situations...because if you sat there in January/February/March 2019 waiting for a "retest" as stocks rallied, you had a very bad time.

Another measure hitting washout levels is the number of stocks in the S&P 500 above their 50-day moving averages, which is at 3.41%. as of Friday.

Even stocks above their 200-day moving average is sitting around 23%, not quite at levels where it previously bottomed, but a move from nearly 80% down to 23% in a week is notable, to say the least.

Last week's rate of change in the S&P 500 was it's largest since the financial crisis. Needless to say, this was a sizeable, fast move.

In terms of sentiment, there are a million ways to measure it.

Everyone's got their own.

The CNN Fear & Greed Index is a simple measure that anyone can pull up on their screen, so let's go with that. While it didn't close at zero last week, it is definitely in the "extreme fear" region of the scale.

My point is that many short-term breadth and sentiment measures are at or near historically-significant levels. When combined with the fact that many of the major indices, sectors/subsectors, and individual stocks are at former support/resistance levels, the weight of the evidence is suggesting a short-term bounce is likely.

Much like seasonality though, if markets don't respond to these "logical" price levels and "extreme" breadth/sentiment readings then that may be the bigger signal and suggest that something more significant is going on.

That's what I'm watching this week. What are you looking at?

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Allstarcharts Team

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