Two Reasons to Look for a Short-Term Rally in Stocks

It goes against my natural inclination to lean bearish…

But two technical indicators say the stock market is now oversold and stocks may be ready to rally – at least in the short term…

Take a look at this chart of the McClellan Oscillator…

The McClellan Oscillator is a momentum indicator that compares advancing and declining issues and illustrates overbought and oversold conditions. At -80, the blue line shows each time over the past two years when the stock market reached “extreme” oversold levels.

Here’s how the S&P 500 performed after each time…

[ad#Google Adsense 336×280-IA]Oversold readings on the McClellan Oscillator didn’t always mark the absolute bottom of intermediate-term corrections.

But the market bounced each time – if only to relieve the oversold condition.

We also have a stock market buy signal from the Volatility Index (the “VIX”).

Here’s a chart of the VIX plotted against its Bollinger Bands…

On Monday, the VIX closed above its upper Bollinger Band – which indicates an extreme move. It closed back inside the bands on Tuesday. That action triggered a VIX sell signal – which is the same as a broad stock market buy signal.

As you can see from the chart, each time this happened over the past year, it marked a short-term top in the VIX. It also occurred near a short-term bottom for stock prices. Take a look…

There are still plenty of reasons to be cautious on stock prices. And the market may go even lower over the next few months. But for the short term – the next several days or so – these two indicators suggest stocks are due for a bounce.

– Jeff Clark

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Source: The Growth Stock Wire