Momentum on Its Side

 | Sep 19, 2011 | 7:00 AM EDT
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For this coming week, some might say the focus will be on President Obama's jobs plan or economic plan. But I say it'll likely all be about the Fed.

 For some reason, Fed Chief Bernanke has decided this week's Federal Open Market Committee meeting requires two days instead of the one previously scheduled day. I don't have exact notes on this, but I believe the last time we a one-day meeting turned into two days was in December 2008. Naturally, I looked back on the market action during that period.

The charts do not line up in the same fashion at all. Back then -- when that Fed meeting yielded plans for quantitative easing -- the S&P 500 had made its low in late November, and had basically milled around at the top of the range for most of the month. As you can see circled on the chart, the day the announcement arrived was a nice one for the market -- and, while the S&P backed off afterwards, that was more or less the extent of it. The index didn't collapse; that came in the middle of January.

S&P 500

What is interesting right now is that stocks are set to begin getting overbought around midweek. For the first time in almost a month, the 30-day moving average of the advance-decline line will lean toward overbought -- not a maximum-overbought reading, but a moderate one. However, notice that this particular momentum indicator has made a higher high. This typically means that, even if the market backs off from the overbought reading, the market is likely to rally again afterwards.

30-Day Moving Average of the Advance-Decline Line

For the past few months I have spent much time explaining that, at some point, lower lows in the indicators almost always get retested. We have seen that in action in the past few months as the indicators have kept making higher lows. Well, now we have higher highs in some of the indicators, and those levels often need to be retested as well. So, for everyone dying to be bearish, keep in mind that the intermediate-term indicators are not confirming a bearish bent just yet. Lower highs in the indicators signal a loss of upside momentum.

For an example, take a look at the red box on the above chart. As you can see, the early-July high in the S&P coincided with a higher high for the 30-day moving average of the advance-decline line vs. that during the previous "rally" in late May (in the lower-left corner of the red box). Now notice the way the S&P backed off after that peak reading in early July, and then rallied again later in the month.

Higher highs often require retests, just as lower lows do. You can see now that last week took the indicator to a higher high than did the previous "rally." As such, the market needs to back off, and the indicator needs to make a lower high, before we can say there is now a lack of upside momentum in the market. In short, even if stocks back off from here, the momentum is still with the bulls.

Still, niggling problems are arising, such as underperformance in breadth. On Friday I explained that breadth was lagging into that session, and the day's action did nothing to alleviate that situation: Breadth was flat, and the S&P tacked on nearly 7 points. The Nasdaq wasn't any better, tacking on 15 points with breadth that actually came in negative.

On Friday the S&P has reached the lower end of the resistance area I have discussed (1220 to 1230). But, again, momentum is on the side of the market -- so, even if it backs off from here, it ought to stage at least one more attempt to the upside. Yes, some of the shorter-term indicators are struggling, but it still feels too soon to be too bearish.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq



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