May Need Some Digestion Here

 | Nov 30, 2012 | 6:00 AM EST
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How many more times in the next few weeks do you think we'll hear midday swoons on rumors that the Democrats and Republicans are far apart? How many midday rallies will we see on word the two sides are chatting again? I know I have lost count how many different swings we've seen this week just on Congress' "open mike" policy. It's exhausting.

In the meantime, a short-term overbought condition is coming up. As longtime readers know, the Oscillator I show here each day is the 10-day moving average of the daily net differential of advancers minus decliners on the NYSE and the Nasdaq. So we look back 10 days in order to determine whether the market is dropping a string of red or black numbers. As we headed into Thanksgiving week, it was a series of negative numbers.

The market has rallied rather hard -- so it will not surprise you to discover that, beginning Monday, the market will begin dropping a long string of black numbers. In fact, seven out of the next nine trading days are set to be black. That is pretty much what we'd call very overbought.

Overbought/Oversold Oscillator -- NYSE

Let me reiterate that I won't know whether this indicator will make a higher high until the session closes Friday. It has not done so as of yet, but the door is still open.

Now let's take a look at the Nasdaq Momentum Indicator. For this one, I've plugged in higher closes for Nasdaq for the next several days so you can see what would hypothetically happen to the indicator -- and, in this case, it would go down anyway. Again, this is the definition of overbought. In fact, the indicator would turn down Friday; it would not even wait until Monday.


Nasdaq Momentum Indicator

It is always difficult to tell what sort of pullback we will see. Will it be more of a consolidation and sideways digestion, or will it be something a bit more violent? Regardless, the S&P 500's 50-day moving average is still rolling over, and it lives just above where the current price is, so this would be a natural point at which the market could take a breather.

I would also note that the number of new highs improved. Still, with 162 new highs Thursday, I think we are all in agreement that if the S&P rallies another 50 or 60 points to the old highs, it is highly unlikely we will see more than 495 stocks making new highs. That was the peak reading in September. That said, for now we can say there was some improvement in this indicator.

I suppose it's possible the market won't pull back or digest its gains, and will just continue to push ahead. In that case, pundits would start dredging up that nonsense argument that there will be a chase for performance, just as they did when the market was at its September highs. But, regardless, the market is heading toward an overbought reading.


Overbought/Oversold Oscillator -- Nasdaq

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