Transports Capture Attention

 | Sep 23, 2011 | 7:30 AM EDT
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Some of the trend lines held and some didn't, but the one to watch in my view is the Transports. The Trannies were the first index down this week and while they broke through 4200 I am always willing to give some leeway on a break like that, especially when it comes after being down so hard heading into it.

Think of it like this: a sprinter can only sprint so far without exhausting himself.  This is different than a marathoner who paces himself to last in the race for a long time. A decline that happens as swiftly as that of the Trannies is more like a sprinter than a marathoner, often the break is an exhaustion one rather than a fresh one.

For this reason we should watch that 4200 area. If the Trannies can only manage a rally back to that level before failing once again then I would consider that a negative. If the Trannies can rally back and recapture that level then that tells us this was more likely a false breakdown and thus the sprinter exhausted himself on the break. Typically I will give it a few days to recapture the level.

There were plenty of questions as to whether or not Thursday's action constituted a successful retest. A true retest would require a close in the S&P below 1120 or an intraday plunge below 1100. We had neither, so there is nothing to compare. 

The number of stocks making new lows on the NYSE was high but still quite far from the number of stocks making new lows in August. In August we had 1292 and Thursday we had 787. That leads me to believe we could still get some positive divergences if we were to break those levels noted above.

The problem for the market is over on the Nasdaq, where the number of stocks making new lows chimed in at 598. The peak reading in August was 725. Keep in mind that the Nasdaq is nowhere near its August low of 2350. It is still 100 points above that level, which is why you do not want to see new lows expand as rapidly as they have. You have to consider: what if the Nasdaq fell another 100 points?  Would we have fewer than 725 new lows? That would be in doubt now.

Elsewhere, in the immediate short term we got oversold. You won't see it on my Oscillator since that requires time to move to the bottom of the page and get oversold, but you can see it in what it will now take the McClellan Summation Index to turn back up. Typically, when we need +4000 advancers minus decliners we know we're oversold. As of today we need +3450.

We have also had two days in a row where 90% of the volume was on the downside which tells us that there has been a lot of selling done, especially when we see how high the volume was on Thursday.

I can see us stabilizing or rallying Friday only to come back down again next week.  We'll keep our eyes on the new lows as well as the Trannies.


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