I received a lot of questions yesterday about the upcoming oversold reading. The reason we will be oversold at the end of the day today is because we will be dropping the last big number off of the 10 Day moving average of the NYSE Advance-Decline line. Today, we drop the big day after the European Summit, where the S&P 500 surged over 40 points. In the early part of next week we will drop some very negative numbers.
The oversold reading is not registering big on the charts, largely because a lot of the downside was seen in a small number of days. If breadth is flat today the reading would be -200, which doesn't seem very oversold for a 50 point decline in the S&P 500.
The reason I believe the oversold indicator works is that after 10 days of the market mainly going down many give up hope. I saw a big change in sentiment yesterday. I have been saying we would be oversold today for a week now. Yet, after a huge drop yesterday suddenly many took issue with this. While the oversold reading is not great, it is oversold no less.