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Market Oversold at Rare Levels

Thursday, 20 May 2010 | 6:00 PM ET

How oversold were we midday? At levels we have rarely seen.

I have struggled to explain how truly rare the market internals have been this week, and especially today.

For example, at the open today:

1) only 61 stocks were advancing, over 2,400 were declining--levels we have rarely seen.

2) the Trin — which measures how much volume goes to stocks on the upside or downside — opened at 15.90. A reading below 1 indicates more volume to stocks on the upside; a reading over 1 indicates more volume to stocks on the downside. A reading of 15.6 was the highest since the October 2008 crash.

The best measure is to look at the moving averages. At the open today, only 7 percent of stocks in the S&P 500 were above their 50-day moving average, according to Bespoke. A little over a month ago, 93 percent of stocks were above their 50-day moving average!

This is an extraordinary reversal, but the key point is this: the 50-day moving average rarely remains above the 90 percent level, or below the 10 percent level, for very long.

In other words, levels like this have traditionally been associated with bottoms.

Large macro events (in 2008, the reading went to zero!) can play havoc with this thesis, but remember — it's buy low, sell high.

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