Yes, That Was a Retest

 | Oct 07, 2011 | 6:51 AM EDT
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Let's begin once again with a discussion of the retest we saw Monday and Tuesday. I realize folks out there believe a retest in the indices means a trip to a higher low. I do not. I believe a retest is a lower low in the index and positive divergences, and that is what we saw.

As I explained Tuesday morning, Monday was the first time in seven weeks no one asked me if this had been a retest. Well, it was. Will we see another one? It's possible, but I would not sit around waiting for it.

The market is no longer oversold. It is short-term overbought. Now, in the same manner that the recent oversold reading was only a moderate one, the upcoming overbought reading will only be a moderate one, as well. That's what happens when the weeks prior are so choppy.

What should really be discussed now is what might transpire going forward. Most major averages find themselves sitting at or near downtrend lines dating back to the summer highs. That ought to act as some resistance now, especially if we consider that stocks are back toward overbought.

But let's look at the chart of the S&P 500, which shows it is possible the low earlier this week was the head of a head-and-shoulders bottom. I have drawn in the potential on the chart below. In light of this, pullback in the next few days could offer up the right shoulder of that formation.

S&P 500

Also on the chart you will see a green arrow. A week ago I discussed the 50-day moving average, indicating the numbers the market was dropping here were at the highs. However, as you can see, it is now starting to drop the numbers from the green arrow forward. You can see the steep drop thereafter, which took place over the ensuing two weeks.

So, within approximately five to eight trading days, the 50-day moving average is set to drop readings under 1200. That ought to flatten out the moving-average line. If that line gets crossed and is flattened out, it will begin to act as support on declines instead of the resistance it has offered for the last few months.

Finally, I realize many watch the yield on 10-year U.S. Treasuries very few pay close attention to the yield on the five-year. However, the yield on the latter crossed over the 1% mark (on a closing basis) for the first time since Aug. 24, and that was for only one day before it headed back down.

We have to go all the way back to early August to see the last time yields reached above 1% on the five-year. Doesn't that look like a bottom? A breakout above this 1% area would not only cross a flat line, but a downtrend line as well.

Five-Year Treasury Bond

The pattern only measures to 1.2%, with an outside shot at resistance in the 1.4% zone. The longer end of the curve might not be moving upward, but this shorter end has potential to be a bottom. If so, doesn't that signal some sort of change from what we've seen for the past two months?



Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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