Sentiment and Technicals align

I have mentioned how sentiment has been approaching extreme bearish levels recently, but now I am seeing deeply oversold technical conditions aligning with those extreme bearish sentiment readings.

Here are some examples:

• The Rydex Nova/Ursa ratio has hit a new yearly low at 0.15
• The Specialist Short ratio recently hit a multi-decade low at 0.13
• The bulls on Market Vane are at their lowest level (58%) since August 2004
• The 10-day put/call ratio hit 1.07, its highest reading since May 2004

These levels are often seen just prior to tradeable rallies. In terms of how the technicals are now lining up, consider:

• The oscillators are now as deeply oversold as they have been at prior bottoms
• The stochastics are oversold on both the short-term and intermediate-term time frames (the last time was April)
• The 10-day moving average of downside volume (NYSE) is at its highest level in over a year

I was probably a little early in citing extreme bearish sentiment as a reason the markets should rally. What was needed was a deeply oversold market to wash out the sellers, and let the market lift thereafter. I think that is where we are now.

The combination of this technical condition and extreme sentiment readings leads me to be more bullish now. As such, I think it is too late to sell, and I am starting to add to my positions as well as put on trading ETF longs.

Long SPY, QQQQ, etc.