Monday's action was just downright sloppy. But what can we expect from a market that broke out without really breaking out? What can we expect from a market that saw the index put/call ratio move down under 100% to show excitement without a good breakout? So in the end, we gave back Friday's gains on the S&P.
The most interesting part of it all is that the Russell 2000 has been a bit of a laggard of late and it turned out to be the only index that managed to stay green -- just barely -- for the trading day. However, even more interesting than that is the breakouts and breakdowns -- or shall I say the lack thereof -- we've seen in the market.
Look at the Russell: It had all the right things in place to break out of this range for the last week, with the market rallying, and instead it opted to sit there and be a bystander. Monday it tried to break out and instead went up and came right back down.
Lest you think it's only breakouts that look like that, it's not. Remember the transports and their breakdown just over a week ago? Yep, you can see it on this chart, they broke down and then promptly rallied 200 points. So they save 'em from breaking down and from breaking out.
Of course, the trannies will have themselves a test on Tuesday, since one of the railroads pre-announced a poor quarter after the bell. Norfolk Southern (NSC) might not get saved at $102 (the recent low), but what about $100? Do we see another save or false breakdown? Or does this finally break with effort?
My point is that the stocks that rallied last week were the ones on the verge of breaking down, not the ones on the verge of breaking out. The ones on the verge of breaking out stalled from a seeming lack of buyers, and the ones that were on the verge of breaking down rallied from either a lack of selling or forcing the shorts to cover; more likely a bit of each.
To me, this is why the cumulative advance/decline line keeps making higher highs, yet the number of stocks making new highs lags so much. The overall effect is a rising tide, but the tide has spent so much time sweeping back and forth that we end up making little or no progress.
What we're left with is a market that is overbought but didn't seem to have much selling oomph behind it. Just stare at the chart of the S&P and see how the ranges have gotten narrower and narrower. As I noted last week, something has to give here. The further we go into the apex of that triangle, the less likely a breakout matters and the more likely we are to meander.
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