Overbought Readings Provide Big Test

We certainly got our mark-up days late last week. And now we look at the first week of 2009.

A while back I had noted that the 30-day moving average of the advance-decline line would be overbought around Tuesday, Jan. 6. That is still the case. But let's take a closer look at this indicator to see how it has performed.

I realize the chart is a bit scrunchy so bear with me on this. Keep in mind this is a moving average so I look back at what numbers we are dropping from 30 days ago. For Monday and Tuesday of this week we are dropping huge negative numbers (30 days ago was Nov. 19, so you can understand where those huge negative numbers come from). The readings for Monday and Tuesday are -2799 and -2764, respectively.

Beginning Wednesday, we start dropping the readings from that Nov. 20 low so you can understand why I have said that we'd be overbought on this indicator around Tuesday.

Now we have a crossroads here because every time this indicator reached an overbought reading in the past 15 months the market has turned down almost immediately. For those of you without a calendar in front of you, we made the highs in the market 15 months ago. Prior to that we got overbought and either stayed there or corrected moderately. So this is a big test. If the market doesn't turn down very soon after the 30-day moving average of the a/d line gets overbought then we have changed the pattern of the last 15 months.

But let's get back to the numbers we're dropping in the next two days. Since they are so huge I expect to see this moving average head upwards for two more days, which means it likely will make a higher high than the October 2007 high (circled in red on the chart).

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At the time of publication, Meisler had no positions in any stocks mentioned, although holdings can change at any time.

Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.