This is the week the market is set to head toward an intermediate-term overbought reading -- the first such reading since mid-November.
The first thing to realize is that, while the 30-day moving average of the advance-decline line hasn't yet made a higher high, it still has a chance to do so. The blue line on the chart below is the indicator. You can see it is currently lower than it was a week ago, so that's the first high to watch. A failure to exceed that level this week would be negative.
However, if you move your eyes over to the November peak in this indicator, you can see how much higher it was at that point than it is now. In my view, that November peak is likely going to be tough to beat.
Step back for a minute and notice the peak in the fall of 2010 on the far left side of the chart. You can see the indicator reached a level of plus 500 and then backed off, only to re-rally to a lower high. More important, it took several lower highs before the market cared. This is why it is more important for the indicator to beat out last week's high than it is for it to beat out the November high.
A higher high vs. last week would tell us there should be more rally attempts after the market works off this current overbought condition. It would say the market is actually struggling more on the upside than it appears. Again, it takes a series of lower highs to lead to a major correction, so a higher high vs. last week, even if it's lower than in November, would say the market should correct and rally again. It would be the second lower high, which would start to raise red flags.
The reason I can't say yet whether or not we'll see a higher high is that the window remains open for this indicator to better last week's high. The numbers the moving average is dropping for the week are fairly large negative ones, which is why it still has a chance. As we head into early February, there are many more black numbers to drop than red ones, and set to make the market overbought.
The oscillator has been doing the same dance it did at the November highs. It, too, has a series of lower highs in place.
From the put-call ratio's move down to 70% last week, we know sentiment has gotten a bit too bullish. The chart I showed Friday indicates the market corrected the last three times we saw this ratio dip so low. Keep in mind that many still want to buy the dip. That usually means they won't get the dip, or the dip will be accompanied by news that scares them so much, they'll no longer want to buy it.