On June 4th, we had several important variables aligned. A few weeks before, on May 22nd, our Psychology Composite had improved to P3 based on the sell-off in the market leading up to that day. The market then rallied and made one last swoop pushing our 21-day oscillator down to a level that "almost always" produces a short-term rally in the days ahead. It is indeed like a rubber band being wound tight in one direction, and then when it reaches its maximum power yearning to be released, it recoils in the opposite direction.
Of course, that Psychology improvement excited us, especially since Monetary and Valuation are so strong, but we had a few "flies in the ointment" that gave us some pause as to whether we should beat the drum with even more intensity - we wanted the OEX option traders to get a little more bullish and the Rydex traders to get a little more bearish. Those "flies" have improved a little bit, but still not to the levels we would like to see. But at the very least, we expected a "recoil" from the very oversold posture. Let's look at the progression so far.
As you observe this 21-day trading pattern, you can see the improvement of Psychology to P3 came from that left shoulder formation on May 21st, then the rally, the fake-out "head" and the rally back up to the shoulder resistance. But now, let's see how much more "recoil" juice is left in the 21-day and McClellan oscillators.
The blue line (McClellan oscillator) in the chart above has moved back to neutral already, but the orange line (21-day oscillator) has a little more juice left. It will be interesting to see if that bottoming formation shown in the chart of the S&P 500 above can move above the shoulder formation or if the market decides to spend a little more time in this formation.
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