The Narrowness Persists

 | Mar 26, 2012 | 6:30 AM EDT
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The other day, I was asked where the W-shaped pattern is -- the one I called for after the March 6 low. The first thing to keep in mind is that the "W" can sometimes come quickly -- and, in some cases, it can arrive weeks later. In this case, if you own anything commodity-related or cyclical, you certainly have felt the "W" effect.

Look at the chart of Materials Select Sector SPDR (XLB). You can see that, after the oversold rally off the March 6 low, the price rallied by $2 and gave back $1. That's the W pattern.

XLB -- Daily

Oil itself may have gone sideways, but Market Vectors Oil Services ETF (OIH) rallied $3 and gave it all back. The resulting pattern is a potential "W."

OIH -- Daily

Away from ETFs, we also see it in everyone's favorite cyclical Dow stock: Caterpillar (CAT). The formation began March 6, with a low at $105, then shares enjoyed a rally to $113 and took another trip down to $105. I have drawn in the "W" on the chart below. But, if you'll notice, the late-January spike low at $105 now says a break under that level will mean that Caterpillar will have built quite a top (green line). In fact, if you look at the chart of OIH, you can see the same pattern: a relatively flat line marking off that late-January low, the March 6 low and last week's low.

Caterpillar (CAT) -- Daily

If we go back to these charts and look at early February, we'll see something in common: They all pretty much peaked right around then. So did the Russell 2000, which is now trading exactly where it was two months ago. That is when the number of stocks making new highs peaked, too. The oscillator reached a maximum-overbought reading Feb. 2, and it has not made a higher high since.

Number of Stocks at New Highs -- NYSE

Overbought/Oversold Oscillator -- NYSE

Early February is when the 30-day moving average of the advance-decline line peaked, as well. It has been in a steady decline ever since, which tells us that this represents the majority of stocks. That shows the current narrowness of the market.

30-Day Moving Average of the Average-Decline Line

The interesting part of this is that, even in technology land, where the world is considered brighter than the North Star, the Philadelphia Semiconductor Index (SOX) peaked in mid-February. The index is trading 1% higher than it was on Feb. 3 -- and, meanwhile, the Nasdaq has gained 6%. Again, this is the result of a narrow market.

SOX -- Daily

About the only good news I see in all of this is that, late last week, I finally began to see several folks notice the narrowness. I even saw someone opine that it was not a good sign that Apple (AAPL) shares peaked when management finally delivered a dividend. Now, I am no fan of Apple up here, since I don't like parabolic charts. But have market players become so accustomed to one-directional moves in Apple that the old adage of "buy the rumor, sell the news" shouldn't even be applied to this beloved name?

In the meantime, the market is modestly oversold and the end of the quarter is coming Friday -- so, by midweek, we should see some markups.


Overbought/Oversold Oscillator -- Nasdaq



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