Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
If there was any lesson from 2008/early 2009 along with the swoons from the European crisis in 2010 and 2011 is oversold can lead to even more oversold. Quite a few of the commodity and industrial type ETFs are quite oversold – for example, their relative strength readings are in the 20-30 range, and they have broken below their lower Bollinger bands. But after a late day pop yesterday they continue their downward path with the rest of the market. Quite a nice head fake in fact late yesterday.
If you are wondering why yesterday’s 1347 level was an area to pop, you actually have to look to the futures market. Futures pricing on the S&P 500 are generally going to have a 4 to 5 point discount to “the S&P 500 (cash)” so keep that in mind as I discuss the numbers below. After the European elections this weekend the futures market opened Sunday evening and a panic low of 1342 was hit, but a small rebound had futures around 1347 for a few hours. That was actually the level at the worst of the selling yesterday yesterday as well as the S&P hit 1347ish before the afternoon bounce. The 1347ish level in futures we spent much of Sunday night at is also the level we’ve seen a good portion of this morning premarket. Doesn’t mean much in the long run, but it helps explain why there was a bounce in this area yesterday.
We are pulling farther and farther on the rubber band here, as the Dow is down 5 days in a row and the S&P 500 from peak to trough yesterday lost nearly 5% in a week. Of course in late 2008, early 2009 5% was just “another afternoon” but excluding “end of world” times it’s relatively severe. So even those expecting a more sustained fall in the intermediate term have to be on alert for the fast and furious dead cat bounces that are hallmarks of these selloffs.
The obvious next level support is the March low in the S&P 500 at 1340 – the main problem is this level is far too obvious…
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