Some Welcome Worry

 | Oct 26, 2011 | 5:45 AM EDT  | Comments
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Well, at least we know the market can sell off when it becomes overbought -- something it isn't able to do during periods of quantitative easing. What amazes me is that, until Tuesday morning's news -- that the Europeans might not make their big rescue-plan announcement as scheduled -- no one had seemed to even fret over those issues. So, at least for Tuesday, we saw some worry come back into the market. That's good news.

In addition, market breadth was not bad at all. If we take the two days together, Monday and Tuesday, the S&P 500 lost about 9 points, yet breadth was essentially flat.  As a matter of fact, since the Oct. 4 low, the net breadth on the NYSE hasn't once exceeded a net negative 2000. In that time we have seen two days when the S&P has fallen 2%.

To put that in perspective, in the final two weeks of September we saw four sessions for which net breadth was greater than negative 2000 any time the S&P fell by 2% or more.

For the Nasdaq, the real test will come Wednesday, when we will see the influence of Amazon's (AMZN) earnings on the statistics. Here again, though, we find that the Nasdaq dropped 61 points Tuesday while gaining 62 on Monday. Net volume Monday was plus 1.7 billion, while net volume Tuesday was minus 1.2 billion shares, for a net gain over the two days.

Nasdaq -- Cumulative Volume

It seems to me that all Tuesday's trading did was relieve the overbought condition and remove some of the froth that had developed in the last few trading days. I can't say why, but it seems that this 1220-to-1230 area on the S&P is like a magnet. The index first touched it in late August, and that level became the top of the trading range. The index was only able to break above it last Friday -- and here it was, two trading days later, right back at it.

I realize the market rarely gives me what I want, but my preference would be for the S&P to come down toward that 1200-to-1210 area and then re-rally from there. Those paying close attention will see where I am heading with this already: If it follows somewhat along the lines of what I have drawn in, in a few weeks we could see a little head-and-shoulders top setup.

S&P 500

However, for now I'll just state this: If Europe disappoints us and the U.S. market falls again Wednesday, the S&P will likely hold that support and attempt a rally again when stocks are back to oversold. It is still my view that the market should re-rally after it works off the overbought reading.

Away from that, once again we ought to keep our eyes on the dollar. When we last checked in on the dollar index, we noted it had hit its upside target. It has since come down approximately 50%, and now finds itself near support around 76. I see a lot of short-term resistance near 77, but I would not be surprised to see the buck enjoy a rally near there sometime in the next few days.

Dollar Index


 

Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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