Markets have rallied for three straight days following the recent correction. But, despite this, stocks are showing some hesitancy on the upside as the gains have been somewhat unimpressive given the extent and duration of the recent correct.
In my view, what the market does in the upcoming sessions could give us a better idea of what to expect going forward. Stocks are technically oversold, so seeing a bounce and buying support is expected. What we need to see is more buyers coming into the market.
For the market to rally further to sustainable levels, buying volume must rise; otherwise, we could see a near-term bearish divergence and what is referred to as a “dead cat bounce.”
Investor sentiment while improving over the last two sessions remains on the weak side. On the NYSE, the new high new low (NHNL) ratio has been below the bullish 70% level since May 10. During that timeframe, we saw eight sessions come in below the bearish 20% level. On the tech side, the NHNL ratio has been below 70% since May 11 but did not decline below 20%. The sentiment readings clearly suggest the caution among investors.
For the rally to continue and be sustainable, we need to see several technical supports. (1) We need to see an improvement in market sentiment as reflected by the NHNL ratio. (2) The underlying technical strength as indicated by the advance-decline line needs to improve. (3) Trading volume needs to pick up on rallies to indicate widespread market interest. (4) Indices need to a strong level of buying support to indicate a potential near-term bottom.
When all of the aforementioned facts come into play, then we can become more optimistic of a sustainable turnaround.