We looked at why the stock market will face some more short term weakness in last week’s market summary.

But remember this phrase:

When you are short, keep it short

Don’t hold onto a short position for too long, especially when the long term trend is still bullish.

With that being said, both the Russell 2000 (small caps index) and Nasdaq have started to become oversold.

Here is the Russell 2000 vs. its 14 day RSI (momentum indicator).

Historically, this has led to some more short term losses over the next 1-2 weeks, which means that RSI makes a bullish divergence before bottoming.

Moreover, the Nasdaq is also some-what oversold (although not as oversold as the Russell). Historically, forward returns are no better than random.

And lastly, I want to bring to your attention a very interesting phenomenon. We have seen some “buy the dip” symptoms in the stock market over the past 3 days.

Each day over the past 3 days:

1. The S&P has closed at least 0.5% above its low of the day (i.e. dip buying from the intraday low).
2. Yesterday, the dip buyers pushed the S&P to within 0.01% of the previous day’s CLOSE (i.e. yesterday almost closed higher than the previous day).

When this happened (historically), the stock market’s short term downside was limited.

Conclusion

The stock market’s short term still has a bearish lean. However, we don’t expect this to be a major decline. We expect the stock market’s 03 short term weakness to be limited.