Oversold bounce. How long will it last?

November 28, 2006 · Print This Article

The major indices quickly bounced off the oversold levels that were quickly established yesterday. The bounce was somewhat expected given the recent strength and the lack of any notable corrections over the last few months. The question is, how long will the bounce last. Will the market quickly turn over during the next few sessions or will buyers show some conviction and keep the extended rally afloat? Monday’s extreme selling pressure could be a warning sign that the correction could continue over the coming days or weeks. Quite often when the market hits new highs and is met by heavy selling pressure the short-term future typically leans towards the bearish camp.

Today’s bounce, while somewhat encouraging for the bulls, was still unable to move the Dow (DIA) out of an oversold state and the other indices are barely clinging to neutral status. The next few days should be very interesting as we move into the bullish transitional period that surrounds months end. In an uptrending market (defined in this case when the 20-day moving average is sloping upwards) the market has historically displayed a bullish bias the last day of November and carries over into the first few trading days of December.

RSI Wilder (5) for November 28, 2006