Selling Pressure Remains Light

 | Oct 27, 2011 | 6:37 AM EDT
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I really would have preferred to see the S&P 500 move down into the 1210 area instead of 1220, but that's not what happened. Instead the S&P went red and breadth stayed positive. Once again, breadth acted much better than the index did on a downward move.

For example, when the S&P was flat on the day, breadth was positive by about a 2-to-1 ratio. I cannot remember the last time we saw such outperformance in breadth. Perhaps it goes along with the European rumor mill, but these better breadth readings tell us that the selling pressure remains light for now.

Since breadth tends to be linked strongly to the action in the Russell 2000, I'm continuing to monitor the ratio of the S&P to the Russell, which is currently at 1.71. As long as it remains below 1.8, this ratio will be supportive of the market. This is important since the Russell is the only index that hasn't yet beaten out its August high. A move above that 740 area should help the ratio continue on its downward path.

Russell 2000

Over the past week or so, I have shown several intermediate-term indicator charts, noting that they have made higher highs -- and that higher highs are usually retested. Rarely do these indicators simply turn downward from a higher high without first backing off and re-rallying. In the past week we have looked at the high-low indicator, the McClellan Summation Index and the 30-day moving average of the advance-decline line.

I have another intermediate-term indicator to add to this mix: the volume indicator. Earlier this week it reached an area that typical halts the upside momentum. It should then back off and re-rally. Again, the key is if it proceeds to make a lower high.

Volume -- S&P 500

As you can see, in this indicator a series of lower highs took place beginning this past spring and right though the July highs -- and all those negative divergences developed into the August rout. However, this week the indicator got up to 56% and is now backing off. Notice that, since late August, after each high it has backed off, then gone to a higher high again. As such, we are still using the recent higher high as our benchmark.

For those wanting to watch for a fly in the ointment, we will once again keep our eyes on the number of stocks making new highs. Should we surpass the high in the market earlier this week, and should this number contract, it will develop into a problem. There were 83 stocks at new highs on Monday on the NYSE; Wednesday saw 52.

Finally, I was asked to follow up my comments on the chart of the German DAX bourse from a few weeks ago. The chart still looks like a bottom to me. As with everything else, it is a bit overbought but it hasn't given much up, either. As long as it can stay above last week's low it ought to eventually make a try for the resistance near 6500. There is a small measured target near 6200.




Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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