If You're Bearish, You'll Need Patience

 | Oct 31, 2011 | 6:13 AM EDT
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The first two days of the week bring us an upward seasonal bias, followed by three days that will bring us the results from the Federal Open Market Committee, from the European Central Bank meeting and the Labor Department's employment data. All of this makes me think we could see some volatility this week.

The market is into a resistance zone and is overbought. As such, it would make sense that any effect from the upward bias could easily be given back afterwards, thus making for a week that satisfies neither the bulls nor the bears.

I keep eying the 30-day moving average of the advance-decline line. As previously noted, we have seen it rally to a higher high and back off. This week should be the first test for this indicator, as it ought to re-rally and test the upside again. The key will be whether it makes a higher high or a lower high. The former is my expectation.

30-Day Moving Average of the Advance-Decline Line

In the chart above, the blue line represents the 30-day moving average of the advance-decline line. You can see it has not backed off very much, with a move from about 300 to 200. When I look at the numbers the moving average line is dropping this coming week, I see the following. 

30-Day Moving Average of the Advance-Decline Line -- Future Numbers

When you look at the numbers we will replace on the moving average, you can see why I believe the indicator has a good chance at making a higher high. In fact, I even did a "what-if" exercise and plugged in a positive day Monday and then three negative days from Tuesday to Thursday -- and itstill eked out a higher high. That explains my inclination is for a higher high in the indicator -- which, as a reminder, typically means that any backing-off from the overbought condition would yield another rally and another test of the high at some later date.

This indicator is set to return to overbought Friday, when the employment number rolls around. It is still somewhat difficult to see when this intermediate- term momentum indicator will be at a maximum-overbought reading, but for now I've got my eye on around Nov. 15.

In terms of sentiment, I am sure the bears will highlight that theMarket Vane bullish percentage is at 49%, the same reading as in late August just before the September decline. However, I would ask you to look at the four-week moving average of this indicator and notice it hasn't budged much.

Market Vane -- Bullish Percentage

On the chart above, Point A represents March 2009, Point B is the summer 2010 low and Point C is the recent low. For those who continue to like the comparison between the spring of 2008 and the present, I would note that the conversion from bearishness to bullishness took just a smidge over three months, and that managed to get the moving average up above 50% (circled on the chart).

So if you are bearish, you will need to exercise some patience based on a number of indicators. First, the 30-day moving average of the advance-decline line would need the market to sell off and then re-rally with negative divergences. The Investors Intelligence readings would have to show more bulls, as well, and theMarket Vane four-week moving average would need to reflect a higher level of giddiness.

I can see the market rising early in the week and pulling back later in the week. But, until we see lower highs in the intermediate-term indicators, I'll continue to expect that pullbacks will lead to more rallies.




Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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volatility is quite low here, and we could see some downsides here in the short term. ...



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