Signs of Fatigue

 | Dec 04, 2012 | 7:15 AM EST
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The market is still overbought, and since there have been no changes in the Oscillator, I won't harp on it anymore. There were, however some other statistics you should note from Monday's trading.

In the morning, when the S&P 500 climbed to make a higher high vs. last week, we also saw fewer stocks making new highs in comparison to last week's numbers. On the NYSE there were 163 new highs last week, and there were only 147 Monday. The Nasdaq saw 75 new highs last week and 59 Monday. That is not what you want to see when a market is overbought, as it displays fatigue.

In addition to this indicator, the KBW Bank Index (BKX) underperformed the S&P again. As a result, the ratio of the BKX to the S&P ticked lower again.

We might also note that Monday was an outside day on the S&P, which means the index made a higher high and a lower low vs. the previous session. That is considered a bearish development. For my part, I have seen countless times when there's been no follow-through on such patterns -- so if the market wasn't overbought, I wouldn't even fuss over it.

To me, though, the index to watch is the Russell 2000. Yes, it made a higher high Monday, but it did not make a lower low -- and it actually held up during the afternoon selloff. But a gap remains from last Thursday's opening. Here's what I'm focused on: What happens if the Russell gaps down now, leaving these few days around 820 as an island?

Russell 2000

If the Russell just gradually fills the gap and retests the downtrend line it broke above last week, then this should be just an ordinary pullback from an overbought reading. But if the Russell gaps down and leaves an island overhead, that would be bearish. Keep in mind that, an island is a gap that remains unfilled.

Russell 2000

Away from that, I was asked to look at the European indices this week. Most of these are at their highs, unlike those in the U.S. Who would have ever thought that could happen?

Let's begin with Germany's Dax index, which saw a reversal Monday -- and, if you squint, you can see it. That makes the 7400 level very important now. Should this reversal take the index back under 7400, and should the Dax stay under that line, this move will have proven to be a fake-out -- not a breakout. If it tests 7400 and hold above that area, then we should see another attempt at the upside.


That's the bullish view. But, from a bearish point of view, a move back under 7400 would look bearish because this whole upside move would look more like a throwback rally to the underside of an already-broken uptrend line. Considering that this is reading as overbought, as well, I'd lean toward a pullback under 7400.


The bottom line is this: It's not whether the markets pull back but how they do so. As the week goes on, we'll check in on some of the other non-U.S. indices.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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