• When will the next Buy Oversold signal occur?

    After several consecutive very negative days for the equities markets, today will be a short trading day probably under the hands of algos and individual traders.

    We can see below that the 20DMF continued showing negativity on Friday and the Overbought/Oversold went deeper into Oversold mode.

    The big question is when to buy the coming bounce.



    I looked at similar Oversold events, when both the OB/OS indicator was in oversold mode and the S&P500 lost at least 7% during the past 10 trading days.

    We can see below that Oversold Buy signals that were issued after such conditions led to very substantial profits. Interestingly, these profits also occurred during the 2008 bear market.



    Below is the Table that lists the occurrence for such signals. We can see that there were only 11 such signals during the past 10 years, but that 7 and 8 days after these signals were issued, all had generated positive returns.



    Conclusions:

    A buy oversold signal is expected to be issued about 3 days after the above setting has been detected. This leads us to December 27, which is the last day for tax loss selling.

    I would not be buying weakness today and if there is a bounce, we should expect sellers to come again in force on Wednesday.

    Enjoy your Christmas. The next daily comment will be posted on Thursday.