This Indicator Is Pointing to a Market Rally

Fear is in the air. The Volatility Index is spiking higher. Washington is shut down. And the country is approaching its debt limit. It's no wonder stocks are falling.

 

After hitting an all-time high of 1,725 three weeks ago, the S&P 500 has tumbled 4%. Analysts and television talking heads are jumping over themselves, making predictions that stocks have further to fall.

 

But there's one indicator that suggests stocks are ready to bounce higher...

 

Take a look at this chart of the NYSE McClellan Oscillator (the NYMO) plotted with its Bollinger Bands...

 

 

The NYMO is an indicator of overbought and oversold conditions. Bollinger Bands help to indicate extreme moves on the chart.

 

Bollinger Bands measure the most probable trading range for a stock or an index. So whenever the NYMO moves outside of its Bollinger Bands, it indicates an extreme move – one that is likely to reverse.

 

The red circles on the chart show each time the McClellan Oscillator dropped below its lower Bollinger Band within in the past year.

 

Here's how those circles line up with the action in the S&P 500...

 

 

After every drop, the S&P 500 rallied immediately. Some of the rallies – like the one in April – were short-term and only lasted a few days. But the gains were there if you were quick enough to take them.

 

The McClellan Oscillator closed Tuesday at -63.65. That's a mild negative reading compared to what it reached at the August and November bottoms. So any rally off this level will likely be mild – maybe only 30 to 40 points.

 

Of course, nothing in the financial markets is ever guaranteed. And stocks may keep falling in spite of the oversold reading. But history is suggesting the market is gearing up for a bounce.

 

Please share this article