GLOOM?

Just as I finish writing about the futures being higher the inflation numbers come out and yikes, the markets think we may have a sniff of inflation.

On the realmoney.com site. two of their technical analysts come out with "we are oversold so we should rally" columns. Helene M and Dick Arms both expecting an oversold rally and I agree although I do not see it on my screens this morning (maybe the wash out we need).

Dick says:

"The markets are becoming oversold, which suggests that we will have a rally, at least in the short term. On the chart, I have shown the five-day moving average of the Arms Index in red and the 10-day moving average in blue. Above the two moving averages is the Dow industrials, for comparison. In addition, I have inserted three vertical blue lines. These lines pass though the current level of the moving averages, and the prior two times we have seen such extreme readings. As can be seen, such a reading on the five-day tends to come in on, or just a bit in advance of, a cyclical low. "

Because the market dropped so rapidly, the 10-day is not yet at as much of an extreme, but it is, nevertheless, approaching a level that usually coincides with a market low. The implication from both of these moving averages is that we are at, or very close to, a rally.

On the other hand, a great deal of technical damage has been done. Many averages, particularly the Nasdaq Composite, have broken important support levels. Moreover, we have seen heavy volume on declines, which is a bearish sign. Therefore, I'd advise only more aggressive traders to try to take advantage of the rally that the short-term Arms Index numbers are signaling."

I track the arms index on a daily basis and yes they are more oversold than they have been in a long time. Does that mean the market goes up?