Give it Room to Breathe

 | Dec 01, 2011 | 6:45 AM EST
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"But Amazon (AMZN) wasn't up much."

"Ralph Lauren (RL) was red."

"Oil wasn't up much."

These were just some of the comments that crowded my inbox during Wednesday's session -- and please let's not forget about Apple (AAPL), which I suppose folks believe should have been up $20 instead of $8. It was as if all anyone wanted to do was find fault with the rally.

No one lauded the move in the banks. All day long I saw commentary about how Bank of America (BAC) was trading near the low of the day. I have not been a fan of this sector, but it outperformed and did well during Wednesday's rally. Further, the banks have (so far) saved themselves from falling apart, along with the ratio of the KBW Bank Index relative to the S&P 500. If the banks can just stay steady, we'll be able to set aside our fretting over the space.

KBW Bank Index vs. S&P 500

Elsewhere, the number of stocks making new highs expanded, as did trading volume. The market also remains oversold. In fact, while I had wanted to see a down day Wednesday -- to set up for another push higher in the oversold rally -- it likely wouldn't have changed the market being oversold. See the chart of NYSE oscillator at the bottom of this page.

Overbought/Oversold Oscillator -- Nasdaq

Of course, above is the Nasdaq's oscillator, so let's take a closer look at the numbers this indicator is dropping on the 10-day moving average for the next week or so.

10-Day Moving Average of the Advance-Decline Line

This does not mean stocks must go up every single day. It does tend to mean, however, that the market should find support on down days, and that it should have an upward bias for about another week.

You may find it curious that this string of negative numbers runs out on Dec. 9, which happens to be the day the Europeans intend to have their meeting and yet another plan ready for us.  The timing is always rather curious, eh?

Now, for all of you who are looking for negatives, here's what you can look for when the indices head toward an overbought reading. First: Is the number of stocks making new highs still expanding? There were 110 at the peak in late October, and Wednesday saw 61 on the Nasdaq -- which, as you can see below, is the most we've seen since then. So if we see fewer than 110 new highs as the market heads toward an overbought reading, it's possible you can fret.

Stocks Making New Highs -- Nasdaq

There is also cumulative volume, or breadth for the Nasdaq. On the chart you can see it is currently lagging the Nasdaq's move. If the market reaches an overbought reading, and there is still a divergence here, you'll be able to fret over this, as well.

Nasdaq Cumulative Volume

But, while the oversold window is still open, we are supposed to give stocks a chance to improve. We are supposed to give them room to breathe. I realize the bears might say, "Give them enough rope to hang themselves." Whatever expression you would like to use, they are still oversold.


Overbought/Oversold Oscillator -- NYSE

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