While it is always possible for oversold to get more oversold, we are reaching a point where a reactionary bounce becomes quite probable. The % of stocks in the S&P 500 trading above their 50 day moving average has taken a swan dive, and now sits at levels last seen right before the QE2 wink and nod was announced at Jackson Hole, Wyoming in late August 2010. Notice on the chart how the selloff in November 2010 (due to Ireland debt worries) barely registered on this chart.
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Does this mean the bottom is here (or near)? Who ever knows. Obviously this reading can get worse as seen by the post flash crash action last summer. What it does mean is the risk factor for the bears has increased substantially and for those who want to avoid whipsaws, cash is a very nice place for now. For more aggressive folk, trying to play some sort of near term bounce becomes more attractive. Due to the rapid pace of this selloff, bears probably would like to see a short term bounces of a few days help to work off this condition. A move back closer to S&P 1290 would be an attractive area to try a new short trade with a very convenient 'stop out' level just above, in case the market pulls off one of its now infamous V-shaped bounces.
Of course we remain hostage to news headlines due to the nature of global events right now, so to some degree every chart must be taken with a few grains of salt.