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Testing Time for Recent Rally



Last week, the focus of the market was on the extreme -- and in some cases historic -- overbought condition after a 12% rally in just over a week.

After reviewing the charts this morning, I can confirm that the major equity indices and their components are no longer overbought. The alleviation of the overbought condition comes from four straight down days and a roughly 50% retrenchment of the rally off the lows. In my view, this is the point where we find out how real that 12% rally off the low was.

The public and private indicators I monitor are flashing no signal on a near-term basis. The markets and their components are no longer overbought, but the indices price levels and indicators remain a solid distance from an oversold condition that would warrant a "buy signal." For example, the percentage of stocks overbought in the S&P and Nasdaq 100 has dropped from a historic high of more than 90% to a current reading in the mid-40% area. Again, not overbought, but also not oversold.

This is an important point because if the market finds some support here -- and does not reach deeply into oversold territory or the lower end of the range -- it would make more credible the view that an intermediate-term low might be in place, even though very few of the weekly indicators that I track lining up to confirm it.

For now, the market and its indicators are right in the middle of the daily trading range and neutral zone. We should find a lot out about the next minor move over coming days. In my view, it would take a break of the trading range to decide which direction the next major move may be.

The major equity indices are right in middle of range and working off overbought condition:

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