More Work on the Downside

There was a time when an overbought reading would have given us a 20-point decline in the S&P 500 over the course of a week or more, not in the course of a few hours. Several of you have written to ask how much of a pullback should be expected and, quite frankly, I cannot answer that.

But to the question of whether we will see more of a pullback, I think the answer is yes.

To begin with we are still overbought. Tuesday's decline helped relieve some of the extreme overbought nature of the market. The other indicator, which I highlighted in Columnist Conversation midday Tuesday, was the index put/call ratio on the Chicago Board Options Exchange which dropped under 100% and stayed there all day. It is a rare event when we get such a low reading on a down day, but since we're still overbought I'll look for some more work on the downside right now.

In addition to the CBOE's readings, the International Securities Exchange does a call/put ratio for equities. I have discussed this indicator with you before. In fact, the last time I highlighted it was just over a week ago on Dec. 1 when we had two readings of 163% and 149% back to back on the Wednesday before Thanksgiving and the Friday after Thanksgiving. As we all know that led to a sharp decline of 80 points in the S&P on Monday, Dec. 1. Tuesday's reading was not that dire but it was a relatively high 147%.

So we'll chalk that up to another reason I think there is more work to be done on the pullback front.

Now just in case you think I have nothing nice to say about the market, let me say that volume was relatively light Tuesday and that is a good thing. I also will say that breadth wasn't that bad at 2:1 negative. We've seen plenty of down days where it is much worse than that.

In addition, the McClellan Summation index still has a decent cushion to deal with on the downside. Then there is the Nasdaq and New York Stock Exchange volume indicator. You might recall that when it was at the highs we said it was bearish. Well, now it has fallen way down and it is near the lows. I suppose we can even draw a sort of uptrend line on the chart.

Keep in mind that everyone loved tech in August. It was the market darling. Now tech reports bad news on a regular basis and there is no love for it. Yet the semiconductor stocks stayed green all of Tuesday in the face of bad news.

So once again I am still in the pullback or correction camp. But I think when the correction is done we'll enjoy another rally.

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Know What You Own: Meisler mentioned semiconductor stocks. Some chip companies are Intel (INTC - commentary - Cramer's Take), Advanced Micro Devices (AMD - commentary - Cramer's Take), Applied Materials (AMAT - commentary - Cramer's Take), National Semiconductor (NSM - commentary - Cramer's Take), Cypress Semiconductor (CY - commentary - Cramer's Take), Texas Instruments (TXN - commentary - Cramer's Take) and Lattice Semiconductor (LSCC - 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.