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Thursday, November 8, 2012 - Short Term Update

|Includes: DIA, FXE, IEF, SPDR S&P 500 Trust ETF (SPY), TLT, UUP

Bottom Line:

The market has broken some important technical and psychological levels. While it is unknown at this time whether this is simply a correction or the start of something bigger remains to be seen, though the market will provide clues in the upcoming days. Continue reading to know what to look for.

Indicator Summary:

  • Bullish: 70%
  • Neutral: 25%
  • Bearish: 5%

Aggregate Interpretation: The last two down days have been enough to push most of the short term indicators I watch to oversold or near oversold levels. As I mentioned in the last few updates, one of the things I've noticed is that the pattern of behavior of the market has changed subtly. In the last several months whenever the market became even remotely oversold there was a strong positive reaction. Then, when the market became overbought it tended to stay overbought for several days while prices pushed higher still. This has certainly not been the case these last few days. Indicators such as the Mcclellan oscillator have gotten oversold yet the market has failed to put together a sustained response. Other more sensitive indicators such as the TRIN have oscillated from oversold overbought several times without price making any positive headway.

Indicator Snap Shot:

Percentage of Stocks Above their 20 DMA:

Notes: Percentage of stocks above their 20 day moving average fell below the 30 mark indicating an oversold condition. Interestingly enough despite the breakdown in price, the indicator remains above the low it set 10 days ago.

NYSE McClellan Oscillator:

Notes: The Mcclellan oscillator has fallen below one standard deviation from the mean and the five day moving average is not far behind.

NYSE New Highs - New Lows:

Notes: Similarly new highs minus new lows also closed below one standard deviation from the mean, with a five day moving average not far behind.

NYSE Advance - Decline Line:

Notes: Two extreme closes and the drop-off effect has moved the five day moving average to oversold levels.

NYSE Up - Down Volume:

Notes: Up down volume hasn't gotten as extreme as the AD line, though it is at levels were the indicator has bottomed before.


Notes: The NYSE tick has also been pulled down into oversold territory.


Notes: The TRIN has been accurate as of late, so I would wait for the five day moving average to reach the 1.618 standard deviations from the mean level before considering another play at capturing a short term bounce.

Price Action:

SPX - 2 hour Bars:

Notes: The SPX has broken down below the 38.2 percent retracement level but as well horizontal support, the trend line connecting the 2011 and 2012 summer lows, and the icing on the cake, today breaking the 200 day moving average. So there has been some technical chart damage. Let's not also forget that prices are now below the three circled areas, which represent 1) the European " we'll do whatever it takes" remarks 2) the Fed QE infinity announcement 3) the Japanese central bank easing announcement (maybe if they keep it up for another 30 years...). The SPX is now approaching several points of support as well as the important 50% retracement level. Bulls will want the declined to stop in this area.


So the big question is... Is this just a correction with the start of a bear market? I'll go over more of the longer term indicators in this month's long-term update, but for now the important thing is to watch how the market reacts to being overbought and oversold. If the market continues lower even though indicators are oversold, and if & when the market does bounce the advances are limited, in the short term expect to the decline to continue.

-Bill L.

PS- I'll be traveling this weekend to help take care of my Dad who will be coming home from hip replacement surgery. I'll try and get updates up as frequently as I can.