Moving On Sideways

 | Sep 14, 2011 | 6:54 AM EDT
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I would love to be able to report that Tuesday was a terrific day in the market, but it was really rather ordinary. Breadth was in line and volume was in line, albeit lighter than it has been on down days. Further, when financial stocks sold off late in the day, they did not light the place on fire.

However, the McClellan Summation Index continues to act well, as does the 30-day moving average of the advance-decline line -- which will not be overbought for about another week -- and small-cap stocks outperformed. Heck, even transportation stocks had a great day.

Last week I showed the chart of the Dow Jones Transportation Index and suggested there might be a head-and-shoulders bottom in the chart. It is still only a possibility, and resistance will start to come in between 4550 and 4600.

Dow Jones Transportation Index

Of course, the Philadelphia Semiconductor Index (SOX) is performing well, too, as it made a higher high. Still, note that the index is now nearing some resistance as well in the 370-to-375 area.

Philadelphia Semiconductor Index (SOX)

However, since the channel in the S&P 500 is now very obvious to all who might look at the chart, I thought I might show a different one today. This time, instead of discussing the S&P, we'll look at the Russell 2000. It doesn't have as clear a channel but, rather, it has developed a triangle pattern -- and its level is now quite far into the apex of the triangle.

Let me first note that triangles are patterns of indecision, as the security rocks back and forth between support and resistance. The key to triangles is that they need to break out somewhere between halfway and three-quarters of the way into the apex, or else the pattern will be deemed unreliable. That is, the pattern is more apt to continue meandering between support and resistance.

Russell 2000

The upper line of this triangle now resides around 720, with the lower line in the 660 area. You can see how far it is into the apex and, therefore, why any breakout -- whether up or down -- needs to happen in the next several days.

What I find fascinating is that, if you look at the Russell chart -- or that of any of the other major indices -- they all show the same pattern: sideways for the past month or so. Yet, just over a month ago, when the market started heading lower, the fear was about the U.S. budget and the eventual downgrade of U.S. debt by Standard & Poor's. The prevailing fear has now metamorphosed to focus on the European contagion. So, following the initial panic -- and despite a subsequent deterioration in the news -- the market did not get any worse.

On that note, everyone seems to be waiting for Greece to default. Well, let me throw this question out there: Why are all waiting if the belief is it is inevitable? You saw what happened after Lehman Brothers. Wouldn't you wish to be prepared this time and have sold in advance?

In the short term, I would remind everyone this is an options-expiration week, during which we typically see at least one down day. As that triangle shows us, it is still a pattern of indecision.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq



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