The Market's First Real Test

 | Jul 09, 2013 | 7:43 AM EDT
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Raise your hand if you didn't see how poorly the semis acted on Monday. Right. I don't see any hands up. That's how obvious their poor performance was.

This is not to say they are terrific. In fact, I have been negative on them for a while -- to no avail I would add since they just seem to chop around -- but I saw folks who loved the semis a week ago turn bearish on them Monday as if they were the only negative game in town. That's the problem with a choppy market.

Don't you think the chart of the SPDR S&P Homebuilders (XHB) is worse than the chart of the Philadelphia Semi Index (SOX)? Heck, Toll Bros. (TOL) is down on the year. The only good news for XHB is that it hasn't broken $28 yet.

In terms of the indicators, the intermediate-term indicators are still pointing upward for now. New highs increased, with Nasdaq showing 100 more new highs than it had in May. But it's the upcoming overbought reading on the Oscillator I now have my eyes on.

Last week we took a look at the string of red numbers we were dropping off the 10-day moving average of the advance/decline line to determine that we were still oversold and the window to rally was still open. As a reminder the Oscillator is made up of the 10-day moving average of the net of the advance/decline line, so we look back to see what numbers we are dropping to determine its direction.

Last week I noted I expected the Oscillator to scoot upward into overbought territory based on that string of red numbers it was dropping. Tuesday is the last day of that red number string. Beginning Wednesday we've got a string of five days in a row where we drop all black readings, hence the call for a short-term overbought market. Here is what the table behind the chart looks like:

Day   10-day ma

Wednesday 1839

Thursday    1593

Friday         2143

Monday      48

Tuesday      1298

Here's where it gets a bit tricky. On Tuesday we drop -2270, so the advance/decline line would have to be worse than that to make the Oscillator go down, so I am of the mind unless the market plunges the Oscillator is likely to rise for one more day, even if the market is down. The question is if the Oscillator makes a higher high or a lower high before Wednesday. A lower high is obviously more bearish than a higher high. That makes Tuesday's action a bit of a test for this oversold rally.

And it should bother you that Blogger sentiment, which has done a terrific job in being contrary recently, shows a big flip flop from 42% bears a week ago to 42% bulls this week. Of late, they have topped out around 50%.

In the meantime, Tuesday is the market's first real test.

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