Lessening of Downside Momentum

Well, thankfully the put/call ratios stayed relatively high Tuesday unlike last week's rally. And did you notice we were able to rally without oil? Amazing.

In the past week or so I have commented several times how good the market's breadth has gotten. I'd like to show you the cumulative advance/decline line. The cumulative a/d or market breadth, is a measure of what stocks are doing vs. the averages.

Often you hear me discuss the number of stocks making new highs or new lows -- lately it's been more about new lows than new highs -- in relation to the market averages. Fewer new stocks making new lows on a lower low in the S&P 500 is actually bullish. It shows a lessening of downside momentum. It shows less selling pressure on a lower low in the major averages.

As I've discussed several times recently, the peak reading in the number of new lows occurred on Oct. 10, when we reached nearly 3,000 new lows. Most recently, on the big breach of the Oct. 10 lows that occurred on Nov. 20 we had about 1,900 new lows. That's not a great reading but relative to 3,000 it's a positive divergence. Monday didn't come close to the Nov. 20 lows, but we still only had less than 100 new lows. That is the lessening of downside momentum that we see.

The flip side of that is that we also need to see the market pick up on the upside. We need more new highs and we need a better advance/decline line. It's a two step process: lessening of downside momentum followed by a pick up in upside momentum.

The new highs still stink. There was exactly one new high Tuesday that was not an exchange-trade fund. But the a/d line has improved quite a bit. Typically the a/d line tracks the market averages. What we want to see is the a/d making a higher high, and thus far that has not been in the market. However, we now have the potential for it to occur. Or at least we've seen the improvement.

The high on the S&P 500 last Friday was 896. On Tuesday, it closed at 848 so it is roughly 50 points below its Friday high. The a/d line is roughly 800 issues (advancers minus decliners) lower than it was at Friday's close.

Consider the math involved here: We rallied 32 points on the S&P Tuesday and the a/d line was +1660. So, if we had a repeat and we tacked on another 32 points, and even if the a/d line was not as good as it was Tuesday and was +1000, we would get a lower high in the S&P and a higher high in breadth.

Now, before you get thrilled and excited over this, we had the same thing occur on Oct. 20. The difference between then and now is that we were so close to the low then and had had no successful tests. We hadn't yet seen a lower low with fewer stocks at new lows. Another difference was that the McClellan Summation index hadn't even turned upward yet, whereas now it has turned upward and has a fairly decent cushion.

So at least we're starting to see some steps in the right direction.

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For more explanation of these indicators, check out The Chartist's primer.

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Know What You Own: Meisler mentioned the S&P 500. Stocks that trade on the index include 3M (MMM - commentary - Cramer's Take), Bristol-Myers (BMY - commentary - Cramer's Take), JPMorgan Chase (JPM - commentary - Cramer's Take), Boeing (BA - commentary - Cramer's Take), Applied Materials (AMAT - commentary - Cramer's Take), ConocoPhillips (COP - commentary - Cramer's Take) and FedEx (FDX - commentary - Cramer's Take).

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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.