Odds of a Pullback Are Growing

 | Jun 07, 2018 | 6:39 AM EDT
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NOTE: I will be on vacation until Monday, June 18.

There wasn't much change in the market Wednesday. Once again breadth was good. And as you know good breadth keeps the McClellan Summation Index rising.

Right now it will take a net differential of -1900 advancers minus decliners to reverse the Summation Index from up to down. Typically once it gets to -2000 or more we consider the market short-term overbought. So a day with decent breadth on Thursday and/or Friday would get this particular indicator to an overbought condition.

The 30-day moving average of the advance/decline line steps its toe into overbought territory on Friday. I have a wide range for this indicator though because it doesn't reach a maximum overbought until a week from Friday.

The Nasdaq Momentum Indicator is still signaling an overbought reading sometime between Monday and Wednesday next week. Since I will not be here to update it as we get closer all I can say is that it has shown those dates for several days now so if it's 'off' it's going to be one day on either side (i.e. Friday this week or Thursday next week).

So this tells us that we're lining up for our first overbought reading within the next few trading days.

The Daily Sentiment Index (DSI) for the VIX fell under 10 (to 9) for the first time in a while. Readings under 10 are considered extreme. I would therefore point out that the likelihood of a pullback of some sort arrives in the coming days, especially if you couple it with the low equity put/call ratio reading we saw yesterday (48%). In fact I would refer you to the chart of the Russell 2000 we looked at yesterday from January to see what is now possible. In other words I think if we get a quick dip we're likely to see stocks rally again thereafter.

One reason is because the chart of the VIX looks different to me now than it looked then (red arrow). It was making higher lows then where it is not doing so now (and we had our VIX pop early last week, which we didn't have in January). That being said, the low DSI on the VIX coupled with the upcoming overbought reading tells me we're due for a VIX pop to relieve the extreme.

I will end with a chart of the Utes because they have collapsed in recent days. I think they are getting mighty oversold as they approach the February lows but the fact that they broke the May lows so easily is worrisome.

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