Thursday, December 09, 2010
a 50-75 point drop is imminent
Here are two charts which are conveying an important message. The bottom chart shows the cumulative total of the difference between the number of advancing and the number of declining issues traded on the New York Stock Exchange each day. The top chart shows my favorite oscillator, the 10 day moving average of advancing issues.
Both these indicators warn of impending weakness in the averages. The cumulative advance-decline line is still visibly below its November 8 top while the S&P 500 is visibly above that same top. This is a real change in behavior because the advance-decline line has generally been much stronger than the averages during the past 18 months. This bearish divergence between the AD line and the S&P tells me that the market will soon drop 50-75 points before the bull market can resume.
The top chart of the 10 day moving average of advancing issues shows a series of bearish divergences going back to early September. This is again a bearish message.
Normally, divergences like these don't worry me too much. But the market is trading near 1250 resistance (the March 2008 low on the Bear Stearns failure) and has advanced with little corrective activity for nearly 4 months to a new bull market high.
All in all I think we shall see a 50-75 point drop before the S&P can move much if at all above 1250.