A Perfectly Logical Pullback

 | Dec 13, 2012 | 6:00 AM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

TLT

,

EEM

Yes, I realize folks will be concerned about Wednesday's market reversal. But let me once again run through some of the statistics here, as these should help you to understand why the reversal occurred -- or at least why I think it occurred.

As measured by the Oscillator, the market is overbought. Not only that, but the Oscillator is at a lower high -- against a higher high in the S&P 500. That is the first negative divergence we've seen in this indicator.

Overbought/Oversold Oscillator -- NYSE

The number of stocks making new highs was pathetic Tuesday, as I've noted -- but Wednesday's numbers were even worse. With the S&P at 1438 intraday, there were 115 new highs -- as compared with 125 Tuesday and 149 on Dec. 3, with the S&P at 1427 and 1422, respectively. Please notice the progression: We're seeing higher highs in the index, even as lower highs emerge in this statistic. That is another negative divergence.

Number of Stocks at New Highs -- NYSE

I spent a great deal of time Wednesday discussing the indices' overhead resistance levels, so I won't review that again. Suffice it to say, however, that I believe this resistance helped to stop the rally in its tracks.

Then there is the Russell 2000, which finally had a great day Tuesday, only to follow it with a textbook gap-fill Wednesday and severe underperformance. This has served to turn up the ratio of the S&P to the Russell, making it look like a potential double-bottom. The same pattern as we saw last week is there. If the index pulls back mildly, then that would be fine -- but if it gaps lower, an island reversal will be present. That would not be fine.

S&P 500 vs. Russell 2000

On Columnist Conversation Wednesday, I posted the Investors Intelligence chart for the bulls, plus the statistics on those looking for corrections. As I noted, when these two ratios combine to broach 75%, it is not necessarily market-bearish, but it does mean the upside is limited.

Investors Intelligence -- Bulls and Corrections

Then there are the U.S. Treasury bonds, which fell hard Wednesday to the uptrend line. I have not had a strong opinion on bonds for quite some time, as they seem to be in a trading range to me. I'd look for a rally attempt in iShares Barclays 20+ Year Treasury Bond (TLT) somewhere between the current level and $122. Should the fund fall harder than that, I'll have to revise my view.

TLT

Finally, last week I ran through discussions of the European markets and the Shanghai Composite, so I suppose it is only natural that a reader has asked about iShares MSCI Emerging Markets Index (EEM). It looks to me as if this fund got tired and reached resistance. However, considering there is an unfulfilled target of $44 to $45 on the chart, I expect a pullback, followed by another rally attempt. A decline to test that line near $42 would be out of a textbook, so it probably won't get that far!

EEM


 

Overbought/Oversold Oscillator -- Nasdaq

In Top Stocks, Helene puts her 20+ years of experience in technical analysis to work for you. Take advantage of Helene's time-proven approach and her action-oriented analysis of technical indicators.  Try it now. Get a 14-Day Free Trial.

Columnist Conversations

Lang:
We added a few plays yesterday, mentioned here and see the results now. SWKS was a blowout qtr and reflected ...
Valmont Industries (VMI) reported slightly above estimate numbers for Q1 and guided in line with prior ranges ...
If the economy is improving and strengthening, then why do the TBT's act so badly? Shouldn't this chart look ...
The powerful post earnings surge that propelled SNDK back up to the $85.00 area may soon run out of steam....

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.