The stated narrative for Monday's pullback was China. I'm not quite sure how that can be since oil -- not the stocks, but the commodity -- started the day lower and closed higher. And then there were the Chinese stocks, which didn't flinch for even a minute and mostly stayed green all day. As I have said before I'd be terrible if I had to give a reason for the market's movements.
What we do know is that we'd gotten overbought and the number of stocks making new highs has been contracting for weeks now. Typically that leads to a pullback. But it is amazing how so many were so complacent last week and then Monday's pullback comes along and all of a sudden I stopped hearing about the seasonality that should lift us into year end.
Now, let's talk about uptrend lines. As you look at charts, you will see some steep uptrend lines off the recent low, but many will look like this chart of the Russell 2000 fund (IWM) .
You might recall back in early November I said I thought that the $190 area was going to be difficult for the IWM, and it was. As noted yesterday, the small caps made a lower high last week. But now there is that low just over $180 from two weeks ago and this uptrend line that comes in right around here. I suspect it does not break swiftly. I suspect it bounces and then breaks it.
I am keeping my eye on a few indicators to guide me. First there is the intermediate-term overbought condition. I think over the course of the next two to three weeks this will need to work its way lower.
Then there is the McClellan Summation Index, which, despite crummy breadth on Monday, still hasn't halted its rise. It requires a net differential of negative 800 advancers minus decliners on the New York Stock Exchange to halt the rise and more to turn it south.
Finally, I am watching the 30-day moving average of the put/call ratio. We don't look at this sentiment indicator often (typically I use the 10-day moving average), but it has been instructive this year. Point A arrived in April when the market was making a high. Point B arrived in August, again as stocks were making a high.
And now we find ourselves at Point C, which hasn't turned higher, yet but has stopped going down and is trying to turn upward. Should it turn upward, this intermediate-term indicator would confirm my view that we should see more volatility in the coming weeks.
I maintain that the Dow is the most overbought and therefore the most vulnerable of the major indexes. But I don't think it turns south in a straight line. Folks have been conditioned to buy the dip in the big cap Dow stocks which is why we could see some rallying attempts before it corrects in full.
