The Pullback Window Is Open

 | Jan 30, 2012 | 6:37 AM EST  | Comments
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Stock quotes in this article:

XLF

In Friday's column I laid out the reasons for believing the market is due for a pullback. Of course, in having this view, my biggest concern is that I have too much company -- and that everyone must be overly prepared for such a pullback. As we know, the market will always do what it can to make the majority wrong.

As a reminder, the main reason for this view is that the market is due to become intermediate-term overbought Tuesday. The 30-day moving average of the advance-decline line last reached a maximum-oversold reading right around Christmas. There is now a higher high in this indicator, which is bullish, as higher highs must get retested at some point in time. In showing this chart, I don't mean so much to show you what transpires after such a peak reading, but more to highlight the higher high and to emphasize how long it's been since this indicator has pushed to such lofty levels.

30-Day Moving Average of the Advance-Decline Line

If I blew up the time periods when the indicator got up into that plus-600 area, you would see that we saw short-term pullbacks each time. This chart is just meant to show the higher high and exactly how high it is.

For those who like to keep track at home, here is the table of the numbers being dropped, for the next two weeks, on the 10-day and 30-day moving averages of the advance-decline line. As you can see, the window is open for a corrective move. If the indices fail to correct while this window is open, then we'll know the market has taken on a life of its own with a perma-bid, as we have seen so often since 2009.

Table -- 30-Day Moving Average of the Advance-Decline Line

Meanwhile, in the last few weeks I've noted several times how many channels we've been witnessing lately. I have not seen many commenting on this particular phenomenon. To remind you, there was the downward channel in natural gas, as well as another in the euro. Last week I showed the channel in the Financial Select Sector SPDR (XLF).

However, if you start focusing on this chart pattern you will soon discover it can be seen in dozens of charts. On the S&P 500 chart, the lower and upper channel lines are around 1310 and 1335, respectively. Keep in mind that, since this is an uptrending channel, these numbers will rise with time.

S&P 500 -- Daily

Now please turn your eyes to the one index no one, except for the media, ever pays attention to anymore: the Dow Jones Industrial Average. Why? As of Friday's close, it is sitting smack on the lower line. Wasn't the Dow the first major index to start an uptrend? It was the leader when all anyone wanted to buy were safe dividend stocks.

Dow Jones Industrial Average -- Daily

Now, I would grant you this: I'll be taking quite a bit of artistic license here if I'm to call it a pure channel. Still, there is no denying it is sitting right on an uptrend line that dates back to the Thanksgiving low. Moreover, just to set the record straight, the Dow actually lost ground last week -- its first losing week since the year began.

In sum, the window is open for a market pullback in the next week or two. Again, if it can't manage to do so when it ought to, then we'll know we're back in a perma-bid market.


 

Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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