A Step Back Looks Likely

 | Sep 09, 2012 | 8:45 PM EDT
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Apparently it's not just the central banks that are killing the bears. I read in The New York Times Friday that this summer's drought is trying to kill them, too -- the animal, not the traders. It seems the lack of food from the drought has forced bears to resort to drastic measures by breaking into homes and restaurants around the country in search of food.

From the looks of stock-market volume in anything related to China Friday, it seems the bears on these stocks had to resort to drastic measures, too, by running to cover shorts. Heck, when I said Thursday that I thought Select Sector Industrial Select Sector SPDR Fund (XLI) would rise, I never expected the rally it actually underwent. Throughout August, the rallies had been rather pathetic in oversold groups, but Thursday and Friday brought substantial volume in individual stock climbs.

This coming week will offer plenty of news as we await the German court decision on the European Financial Stability Facility. I suspect the ruling will be "yah" rather than "nein" -- but with conditions. The Europeans seem to like "conditions." That decision will be followed the next day by the U.S.'s very own Federal Open Market Committee announcement on quantitative easing after a two-day meeting. To QE or not to QE? That the question. For this I have no guess; but we all know that, if the Fed doesn't actually do anything, it will surely remind us that it stands ready willing and able to jump right in should conditions warrant it.

If that weren't enough, there are elections in the Netherlands Wednesday, and yet another European Union summit is planned for Friday, to be quickly followed by the G20 summit during the weekend. That will come ahead of Rosh HaShana, the Jewish New Year, next Monday, Sept. 17.

I have run through all this because the market is only moderately overbought as of Friday's close, but it will get back toward a maximum-overbought reading by the end of the week, likely this coming Friday. The Oscillator I use is the 10-day moving average of the NYSE advance-decline line. For a more intermediate-term view, I use the 30-day moving average of the advance-decline line. For these indicators, then, we look backwards to the numbers being dropped in order to predict what might happen going forward.

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

Beginning Monday, Sept. 17, here are the numbers set to drop on both the 10- and 30-day moving averages:

Data -- 10-Day and 30-Day Moving Averages of the NYSE Advance-Decline Line

As you can see, there is not a lot of red on that list. When the Oscillator drops red numbers, as it had done post-Labor Day, it means the market is oversold. A string of black numbers signals an overbought condition. Sure, much can change between now and next week, but that's how it's setting up as of this moment. We will also watch the charts of these two indicators. So far, they are both at lower highs. If that's still the case at the end of the week, I would consider it a negative for the market. Higher highs would be positive.

For the week ahead, we saw some very low put-call readings Friday -- the total put-call ratio sank to levels last seen Aug. 17, when we saw a short-term high in the market. If we couple that with the high ISE equity call-put ratio discussed here Friday, it points to a market dip of some sort early in the week. I think such a dip would find buyers for another push upward, which would then take stocks into the overbought reading discussed above.

Perhaps, this year, that old adage of selling before Rosh HaShana and buying on Yom Kippur will actually work.



Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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volatility is quite low here, and we could see some downsides here in the short term. ...



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