A Perfectly Logical Pullback

 | Dec 13, 2012 | 6:00 AM EST
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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.


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!



Overbought/Oversold Oscillator -- Nasdaq

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