Expecting a Brief Retreat

 | Oct 24, 2011 | 6:53 AM EDT
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Did you see the breakout? Of course you did -- there is little way you could have missed it. Now folks can stop talking about the trading range in the S&P 500.

My guess is that this commentary will die down, and the next big topic of conversation will be the 200-day moving-average lines -- which are still declining, and are not so far ahead of the current level. The 50-day, as I have discussed for weeks now, has potential to curl upward. That's an unlikely scenario for the 200-day, as the best it can do is flatten out.

That 200-day line currently resides around 1275. I suspect the bears will start making comparisons to 2008 soon enough -- not with the fall of that year, but with the spring -- especially if the S&P stops in its tracks in that 1275 area.

S&P 500

In the chart above, take a look at Box A, which contains the head-and-shoulders top from which the S&P broke down. This was followed by the Bear Stearns low (see arrow) in March of 2008, after which the index hurriedly scurried upward to the 200-day (green line) in late May -- two months later. As such, the timing was not as coordinated as it would be in today's market.

While I do not yet see that sort of decline in my work, I will keep this comparison in mind in case I begin to see some other similarities in the indicators. Right now I do believe the 200-day moving average line will act as resistance.

In the meantime, the market has returned to a short-term overbought condition, and you will see that the oscillator has made a lower high. This is the first negative divergence we've seen in this indicator, and I suspect we'll have to see more before a meaningful decline will follow. However, this does signal that there was no meaningful momentum to back up the breakout from the S&P trading range.

Overbought/Oversold Oscillator -- NYSE

In addition to the lower high in the oscillator, the put-call ratio moved under 100% for only the fourth time since late July, with the market having pulled back in the three previous instances. In fact, the equity put-call ratio was at 50%, a reading not seen since late May! Was it the breakout from the trading range that got folks so excited, or was it the rescue bank plan out of Europe? There was clearly a shift in sentiment Friday.

Typically when the market rises into option expiration, it will unwind and give back a bit the Monday afterward. So, considering the lower high in the oscillator and the lower put-call ratio, I'll be seeking a pullback.

However, there is now a higher high in the 30-day moving average of the advance-decline line. This is now showing a minor overbought reading, and is another reason we should see the market pull back some this week. However, keep in mind that a higher high usually needs to be retested. Typically we see a backing-off and a re-rally (see the oscillator above, which did exactly that).

30-Day Moving Average of the Advance-Decline Line

Also, the high-low indicator -- which I highlighted prior to my time away -- continues to rise. It, too, has made a higher high, and higher highs tend to get retested.

To recap, what I expect here is a bit of a retreat, followed by another rally.


Overbought/Oversold Oscillator -- Nasdaq

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