In a bull (rising) market or a neutral (sideways) market, oversold conditions tell us that sellers have left the building and that a price advance is likely. The message is especially compelling when oversold conditions exist in all three time frames. However, in a bear market indicators have to be viewed with a negative bias, and we are definitely in a bear market. (See last week's article on long-term sell signals.)
When the market is oversold in a bear market, our first concern should be that prices, rather than advancing, will slide even lower because the buyers have left the building. That doesn't mean that the market can't rally. It does mean that the market is less likely to rally, and, when it does, the rally is likely to fail. On the left side of the chart I have annotated a portion of the last bear market, which illustrates dismal price performance in spite of oversold indicators.
Bottom Line: Indicators need to be interpreted wthin the context of the overall market trend. Currently the market is oversold in a bear market, so the best we can hope for is a rally that will fail before it can make new highs. That we have seen the final low of the bear market is unlikely because bear markets usually last longer than this.
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