A Crucial Level to Watch

 | Jan 23, 2012 | 6:25 AM EST
  • Comment
  • Print Print
  • Print

This is the week the market is set to head toward an intermediate-term overbought reading -- the first such reading since mid-November.

The first thing to realize is that, while the 30-day moving average of the advance-decline line hasn't yet made a higher high, it still has a chance to do so. The blue line on the chart below is the indicator. You can see it is currently lower than it was a week ago, so that's the first high to watch. A failure to exceed that level this week would be negative.

30-Day Moving Average of the Advance-Decline Line

However, if you move your eyes over to the November peak in this indicator, you can see how much higher it was at that point than it is now. In my view, that November peak is likely going to be tough to beat.

Step back for a minute and notice the peak in the fall of 2010 on the far left side of the chart. You can see the indicator reached a level of plus 500 and then backed off, only to re-rally to a lower high. More important, it took several lower highs before the market cared. This is why it is more important for the indicator to beat out last week's high than it is for it to beat out the November high.

A higher high vs. last week would tell us there should be more rally attempts after the market works off this current overbought condition. It would say the market is actually struggling more on the upside than it appears. Again, it takes a series of lower highs to lead to a major correction, so a higher high vs. last week, even if it's lower than in November, would say the market should correct and rally again. It would be the second lower high, which would start to raise red flags.

The reason I can't say yet whether or not we'll see a higher high is that the window remains open for this indicator to better last week's high. The numbers the moving average is dropping for the week are fairly large negative ones, which is why it still has a chance. As we head into early February, there are many more black numbers to drop than red ones, and set to make the market overbought.

30-Day Moving Average of the Advance-Decline Line

The oscillator has been doing the same dance it did at the November highs. It, too, has a series of lower highs in place.

Overbought/Oversold Oscillator -- NYSE

From the put-call ratio's move down to 70% last week, we know sentiment has gotten a bit too bullish. The chart I showed Friday indicates the market corrected the last three times we saw this ratio dip so low. Keep in mind that many still want to buy the dip. That usually means they won't get the dip, or the dip will be accompanied by news that scares them so much, they'll no longer want to buy it.


Overbought/Oversold Oscillator -- Nasdaq

Columnist Conversations

After a very calm and sedate period of volatility which saw the VIX fall not only to all time lows but had a r...
today is a good day to lighten the load and take some positions off the table. SOLD WB OCT 85 CALL AT 11 (i...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.