From Bears to Bulls, Overnight

 | Oct 25, 2011 | 7:40 AM EDT
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If you turned on the television to CNBC for five minutes Monday, you would have thought copper was trading at $6 a pound instead of $3.50 -- the level where it was trading a week ago and about a month ago.

Yes, the Chinese purchasing managers index (PMI) was better than expected. But, for the past month, the chant on Wall Street has been the extent to which copper's prices have pointed to recession, how copper's action has been bearish for China, and so forth. Yet copper only broke its September low by a smidge. In fact, if you want to see a head-and-shoulders bottom, there is one for you. This one new data point seemed to change sentiment by 180 degrees.

Copper -- Daily

My point lies not in the copper chart, which I have liked for quite some time now -- it measures up near $4 on the December contract. My point is how one data point has seemed to change bears to bulls overnight. As a contrarian you can imagine how I cringe when I hear all this happy talk that was not present a week ago. Yet there are different time frames to look at.

On a short-term basis, the market is overbought (more on that below) -- and, based on the copper commentary, market players are likely a wee bit too giddy. However, for those of us who are contrarians, here's what to keep in mind: Sometimes, when sentiment shifts, those folks are right. Think about it: If the shift were wrong every single time, these folks would stop playing, so we know they must be catching some of the move.

Also keep in mind that the real low in the market came Aug. 8 and Aug. 9, when the number of stocks making new lows peaked. Every visit downward after that was a test and a retest. The market tested and retested for two months. So, even if we see a market high this week based on the overbought reading, it would still need to be tested and retested in the coming weeks.

On Wednesday the Europeans are slated to announce their latest, greatest rescue plan (if they don't change the date again, that is). Yet no one seems the least bit worried over that. Now look at the chart of the McClellan Summation Index and what it requires to turn it from an upward to a downward trajectory. At present it would require a net differential of minus 4700, in advancers minus decliners on the NYSE, to halt the rise. You can see on the chart that this is often a sign the market is overbought on a short-term basis.

McClellan Summation Index

Based on this indicator, if we don't see some downside Tuesday, that would set up a decline scenario for Wednesday when we hear from Europe. It doesn't have to be a massive decline, since you can see that last week's 2%-to-3% pullback managed to relieve that overbought situation. However, something should relieve this overbought pressure in the next few trading days -- after which I would expect the market to rally again.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

Columnist Conversations

volatility is quite low here, and we could see some downsides here in the short term. ...
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this chart is showing great bullish signs here, we like this to take out the old high shortly. ...



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