Most traders know that there’s no end of ways to measure if the stock market is overbought or oversold. Hours can be spent pondering this basic, but critical condition. For most of my work, I use a very short, 2-day RSI momentum indicator. This serves me well for my hit-and-run trades. However, it pays now and then, to step back and get a grip on the big picture. So, I’ve included a multi-year monthly chart with 12 and 24-month EMAs above a 12-period RSI momentum indicator.

For 5 years, from April 2003 until February 2008, the monthly price bar hugged the 12-month EMA like a dog on a chain, only drifting away for a few months rally now and then. In fact, we could be comfortably retired if we had bought the SPX futures when the 12 month EMA crossed up through the 24 and sold them when it crossed down through the 24. February 2008, of course, is another story and the market crashed almost 700 SPX points from 1400 to a low of 740. Now, we’re bouncing off the 800 level, testing the support which comes from the 2003 lows.

Millions of dollars are being bet on whether we hold this level or not, a wager that keeps the daily action choppy and uncertain. The 12-month EMA is plunging to meet price, but price is way, way, away. It should be clear that price is stretched further from the 12-month EMA than most of us have seen in our lifetime. The 12-month RSI is also at an extraordinary low–in fact, I saw a monthly chart that went back to the 1920s and the 12-month RSI wasn’t this low then. So, big picture, we’re historically oversold and overstretched and a solid argument can be made that someplace along in here we’ll rally, perhaps all the way back to the declining 12 month EMA around 1000-1100. I’m not going to make that argument, however. I think, most likely, we trade sideways, bouncing up and down driving investors crazy. Once everyone gets bored and sick of the sloppy action, then there’s hope that we might turn up.