Charts Say Any Dips We Get in Market This Week Should Reverse

 | Mar 12, 2018 | 6:07 AM EDT
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IWM

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Did you feel it on Friday? I know you did. The market's sentiment shifted.

It started right after the January U.S. jobs report, when the PowerShares QQQ ETF (QQQ) made a new high. And it built as the day wore on.

We can see this abrupt shift in the total put/call ratio, which made its way down to 81% -- the lowest reading since Jan. 29's 74%. Now, 81% is nothing special on its own; in fact, I call it neutral. But to me, it shows that we finally have acceptance of the market's latest rally, which has been missing for the past month.

And while Friday's acceptance was quite obvious, note that the equity put/call ratio has now been in the 50s for four of the last five trading days. That's also something that we haven't seen since late January. So, acceptance of the rally has actually been building for a few days.

The 10-day moving average of the equity put/call ratio isn't extreme; there's no giddiness. But you can see that it's doing its job -- peaking at the market's lows, then making its way lower as folks embrace the rally:

And when you look at the Nasdaq Overbought/Oversold Oscillator, you see that it's lower even as the Nasdaq Composite itself has made a higher high:

Yes, that's a negative divergence, but I'm in the camp that says the Nasdaq Composite gets the benefit of the doubt to rally even more. As you might recall, we can look back at what numbers that are dropping off of the advance/decline line's 10-day moving average to see when we think this indicator will reach an overbought condition. This table shows the ones that will drop off this week:

Notice that Monday's readings might be tough to beat, as we're dropping a +918 net differential in the advance/decline line. But look ahead to Tuesday, Wednesday and Thursday. Those are some decent-sized red numbers that we'll be dropping.

Unless we replace those negative numbers with even-larger negative numbers, the oscillator should rise further. That's the window that remains open.

Meanwhile, we looked at this table last week:

As I explained then, the advance/decline line's 30-day moving average was oversold at the time. However, you can see the impact of all of the red numbers that are listed in the 30-day table above.

Once Thursday arrives and some of those red numbers fall off, the 10-day oscillator will be at a maximum overbought reading. The 30-day moving average should follow suit about a week later.

It'll be a negative for the market if the number of stocks making new 52-week highs is still lagging and sentiment is too giddy by the time both of the oscillators enter overbought territory. But until then, I'll say what I've said for the past week: I think any stock-market declines will lead to more rally attempts.

I want to end with a chart that shows the ratio between the iShares Russell 2000 ETF (IWM) and the SPDR S&P 500 ETF (SPY) :

Yes the small-cap-focused IWM did great last week, but notice that relative to the big-cap SPY, it peaked on Wednesday. In my view, it's a positive when small-caps lead. Small-caps lagging? Well, not so much. We'll monitor this relationship as we head into the overbought condition that I predict is coming.

And lastly, here's the Overbought/Oversold Oscillator for New York Stock Exchange-listed issues:

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