Is the Market Primed for a Rebound?

The DOW surged 128.87 points last Wednesday, and suddenly I heard suggestions that the market is primed for a strong rebound and that a bottom had been reached. After falling to 10,098 on October 13, the DOW rebounded over 300 points to break 10,400 last Wednesday. But, before you get overexcited, know that the subsequent buying was primarily due to an oversold market. The reality is that the underlying strength in the market remains suspect. The near-term trend at this time is neutral to negative, and it will take more than a one-day bounce to get me excited.

 In my view, the failure of the DOW to hold above 10,400 and to follow through last Thursday is a signal that the rebound may be nothing more than a dead cat bounce. Unless we see a concerted effort on the part of the market to break above key technical resistance levels on rising volume, then, as far as I’m concerned, I would be hesitant to enter on the buy side.

 Fact is, the market breadth remains lackluster. We did see close to two billion shares accompany last Wednesday’s rebound in the NASDAQ, but its failure to follow through is a concern. What we need to see in a rising market is consistently higher volume and an upward trending market. So far, this is not happening. And until this happens, I won’t be betting on a rebound.

 If you want a sense of the market sentiment, take a look at the new-high/new-low ratio (NHNL). When the ratio is above 70%, it is bullish; below 70%, it is a warning; and below 20%, it is bearish.

 The daily NHNL on the NYSE has been extremely weak. The NHNL ratio has been below 2.0 in 26 of the last 29 sessions and below 1.0 for the past 11 straight sessions. It has fallen to 70% or below in 22 of the last 27 sessions, including nine of the last 10 sessions at below the bearish 20% level. As for the NASDAQ, 24 of the last 26 sessions have shown a reading of below 70%, a warning sign. The sluggishness of the NASDAQ over the past few weeks supports the weaker NHNL ratio. Monitor the ratio, and you should get a better feel for the market.

 In my opinion, investors should wait for the markets to settle down before jumping in.