A Mixed Bag

 | Dec 09, 2011 | 7:21 AM EST  | Comments
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TLT

So the ECB lowered rates, the market rallied and then the Europeans made some statements that implied there would be no big bazooka ... and that was it. The overbought reading kicked in.

The statistics from Thursday's decline were not great, but they weren't horrid either. For example, breadth was as we'd expect it to be, in line with the decline, yet the TRIN was quite high (over 5) and down volume was 90% of total volume. Those last two indicators tend to mean the selling got a bit extreme in the very near term and the market should attempt a rally in the next few days.

But as we know from the past few days, the market has only just reached an overbought reading, so anyone looking for a significant move to the upside will likely be disappointed. This doesn't mean we can't rally, but it does mean it is hard to make progress on the upside.

Keep in mind the 30-day moving average of the advance/decline line is still not oversold. It's no longer overbought, but as far as oversold goes, that is still elusive. The McClellan Summation Index, which we discussed this past week, had hardly gotten going on the upside and now is threatening to turn down.

Another interesting aspect of Thursday's action was that the put/call ratio, after failing to go under 100% for months on end, failed to go over 100% on this sharp down day. The Index put/call ratio slipped under 100% earlier this week, and as we have learned, such a move implies a down move shortly thereafter. So while we see some element of panic in the TRIN and the downside volume, we failed to see it in options activity.

So the mixed indicators remain. I believe if we weren't beholden to the Europeans and their nonsense, and if it weren't the end of the year, the path to the downside for the next week or so would be clearer.

Gold clearly saw there would be no quantitative easing from Europe as it gave back all its gains from the week. When we checked in on it earlier in the week, I thought we could break that uptrend line and then rally back to the underside of it. Instead we held the line and then rallied, failing at another lower high. This action has now established 1700 as an important support area. It remains my view that this level should be broken sometime soon, even if just for a short-term panic.

Oil continues to act toppy as well. It shocks me that no one is talking about the potential double top in this chart. Yes, I realize the threat of war in Iran is supposedly keeping oil up here, but then what is oil telling us by not maintaining itself over $100? There is some support in this $96.50-$97 area, and if that gives way I expect a visit near $95. In fact, if that gives way I fully expect we'll hear all sorts of talk of this being a double top. That's probably when it will bounce.

Bonds rallied hard, taking the iShares Barclays 20-Year Treasury Bond Fund (TLT) up sharply. A move over $120 on TLT would negate the potential head-and-shoulders top in this chart.

One final note of interest if the dollar vs. the euro. For all the failed talks out of Europe, the euro has still not broken $1.32. Even more mixed messages.

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