On this day, the S&P 500 dropped by almost 3%. This strong decline led to the critically low market sentiment readings seen at point A. Chart 3 (below) provides a two-year view of the action on the S&P 500 index – it places point A into a larger context. The two-year chart reflects how the critically low A/D volume and issues ratios served as a confirmation of an uptrend already in progress. The critically low market sentiment reached at point A gave further impetus to this uptrend, extending its run for another 20%.

After a strong one-week decline that began on April 10 and ended on April 14, 2000, market sentiment reached extremely negative levels at point A. The S&P 500 index lost 11% in only 5 trading days. Immediately after reaching the critically low sentiment readings at point A, the index recovered with a rally of 8.5% over the next 3 trading days.

Over the long-term, the market was overbought and thus ready to correct to the downside (chart 3 shows the market topping out shortly before reaching point B. This was at the height of the Internet bubble). Over the mid-term, the market was however oversold (look specifically at point B on chart 3) and therefore ready to reverse to the upside.

Despite the fact that the market was overbought over the long-term, it proceeded to rally for some weeks, because it had reached extremely oversold levels at point B. The result was a mid-term upswing that took place around the time the market switched from a long-term uptrend to a long-term downtrend. After a brief correction from the mid-term oversold levels at point B, the market reverted back to its long-term overbought status, from which it corrected with a long-term downtrend.