I don't believe I have ever seen a market like this. It has no follow-through, whether it rallies or goes down -- in other words, we're still seeing very choppy action.
Most days, when we discuss "the market," we're looking at the S&P 500. For example, it seemed everyone was so intent on watching the 200-day moving average for that big breakout or failure -- but it was the 200-day in the S&P, and not anywhere else.
Yet if we want to discuss which index was the leader last year, it was the Dow -- that ancient average with all those dividend-paying stocks. It was the Dow that pushed through its 200-day moving average line, way back in late November and early December. In fact, the index pushed through for the first time in early November, then lost it in the November swoon.
For this reason I believe the Dow is where we need to focus right now, and the 12,500 area is some decent resistance on the index. (For those of you who don't even know where the Dow is trading, it closed Wednesday just over 12,400.) Here is a long-term chart of the Dow, dating back to the 2007 high. You can see there is a downtrend line that connects our spring and summer peaks, and that comes in right around 12,500.
Below is a close-up of that chart. As you can see, the uptrend line the Dow broke back in the summer comes in around 12,500, as well. It is my view that we ought to see some resistance up there the first time the Dow visits that area.
If we then take another look at the 10-day moving average of the equity put-call ratio, we'll see that it ticked up Wednesday. As noted here yesterday, this tends to be associated with an overbought condition in the market. It is not meant to capture the exact day but, rather, the basic time horizon.
My own oscillator is now pushing up into that same area from which we've seen it get overbought, as well. Keep in mind not all overbought readings from this area are created equal. In March last year (box A on the chart) the correction was relatively shallow, as opposed to all the others. Note that, in October and November, it took a week or two before we saw a serious slide. The one thing we can ascertain from this chart is that the market did not just keep rallying without some sort of a pullback shortly after reaching an overbought condition.
In my view, unless we are about to hear an announcement about another quantitative easing program, in which case the machines would take over and there would be no swings in the market, stocks are likely to pull back in the next week.
Let me reiterate that the 30-day moving average of the advance-decline line is not yet overbought, and that should lend support to a market that backs off. That is one reason I continue to believe the market is more apt to be choppy than explosive.