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Odds Are Very High That Stock Market Will Rally Over the Next Month

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NEW YORK (TheStreet) — Friday’s opening minutes should bring extra stock market volatility, as the widely anticipated nonfarm payroll report arrives not long before the opening bell rings on Wall Street. After some wild reversals in the past few weeks, there is short-term light at the end of the first tunnel lower from the all time highs, as the stock indices around the world are oversold.

This daily bar chart of the Russell 2000 below shows many reasons that stock indices are within hours of registering an interim low that should last three to five weeks. First, notice the lows this week broke under the low of Aug. 24, satisfying the minimum requirements of a mature impulsive decline from the all-time high of 1295 (buy signal No. 1). While not required, the pattern would look more complete with one more lower low, either Friday or Monday, below that of this past Tuesday (1078). This is what the classic Elliott Wave pattern would look like, so it should be expected until it’s able to be negated, which a rise above 1146 would do.

Click here to see the following chart in a new window

Next, notice that the stochastics, in the lower pane, have reached below the extreme oversold 10% threshold and have crossed up (buy signal No. 2). Further, the stochastics have also moved back above the extreme oversold 10% threshold (buy signal No. 3).  

Also at this week’s low, prices closed below the lower three-standard-deviation bands (orange), which include 99.7% of normality, and prices have already moved back above this oversold extreme (buy signal No. 4). Any further weakness in the next couple of days will likely test, and hold, the lower four-standard-deviation band (red), which includes 99.9% of normality. These extreme stretches below the 200-day moving average should be thought of as what the underside of a trampoline looks like as a 4000pound person jumps onto it from the side rail, and the next action is an equal and opposite reaction: a violent rebound! This is because these extremes are statistically impossible to maintain for more than a few hours or a few days.

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