When you look at the chart of the Overbought/Oversold Oscillator you would surely say to yourself, there is no way this is overbought. I mean, it seemingly just crossed over the zero line and it is nowhere near the previous overbought readings of 2018.
Keep in mind that this is the 10-day moving average of the net of the advance/decline line and the a/d line has been green for eight of the last 10 days. Here's the rub: in those eight up days there was only one day that the net breadth was more than +1,000. That is highly unusual.
To determine an overbought reading I tend to look at the numbers we're dropping off this 10-day moving average. If there is a string of red numbers to be dropped (as there was last week) then we're oversold. If there is a string of positive numbers to be dropped, then we're overbought. The next five days have positive numbers to be dropped. I will grant you that none of these are big numbers and therefore are "beatable."
But I think it makes us overbought enough to see some sort of pullback.
Last week I noted that I had not seen a situation where the McClellan Summation Index refused to rally while the S&P was headed higher. I have searched, figuring that the breadth of the market was so poor in late 1999 and early 2000 that surely I would find an instance at that point in time but that was not the case. If you know of an instance, please let me know since I have come up empty.
What I can note to you is that it will still require a net differential of +300 advancers minus decliners to turn this indicator from down to up. Typically when it takes that long into a rally for this to happen we do see a pullback. A pullback in the market would probably set up the Summation Index to turn up the next time the market gets oversold.
I tend to concentrate on the indicators more than on what the charts of the indexes look like but I thought both the S&P and Nasdaq were in an interesting spot as we get overbought. The S&P gapped up last Thursday and held that gap on Friday. If for some reason it gaps under 2910 and holds under there it would leave an island overhead.
Nasdaq has been hugging this uptrend line since the spring. A break of that uptrend line would, I believe, get folks who look at these things, concerned.
So as the market gets overbought those are the patterns I would watch because they probably hold the key to sentiment.