Take Notes on Monday's Decline

No matter the cause of the selloff, the A/D line, commodity and bank stocks bear watching after it.
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So I guess folks were right to be concerned about the month of May.

Or maybe they were wrong to believe Mr. Bernanke's comments last week.

Whatever the reason, the market clearly did not like his flip-flop (and probably his method of delivery, either), and that resulted in a late-afternoon decline.

But there are a few things of note that we should look at in Monday's decline.

To begin with, the advance-decline line wasn't awful.

Of course, that's probably because the commodity stocks were all rocking yesterday. (Whatever happened to the A/D line being bad on days the financials sold off?)

But that brings us to another issue: the commodity stocks have been rocking for two days now, and the number of stocks making new highs is still well below the peak reading of April 19.

So what if the commodity stocks start to falter?

If the commodity stocks start to falter, we're going to get a surge in the VIX.

Let's take a look at the VIX because it has quietly made a higher high vs. last week.

No, it's not jumpy yet, but doesn't that look like a big base?

If the commodity stocks start to catch a wave of selling later this week, we could see the VIX start to jump up out of that base. And when the VIX gets jumpy we tend to get a rally.

We're not there yet -- and each time I've asked for such a setup, I have been disappointed as it fails to arrive -- but that would be one thing to watch for as the week progresses.

Another indicator we need to watch is the number of stocks making new lows.

The peak reading on the

NYSE

was 190 back on April 17. Should we get a whack that takes the

S&P 500

below 1280 -- the level it bounced from on April 17 -- and the new lows fail to expand, we might once again have another trading rally at hand.

That's an awful lot of ifs, but it is something to look for should we get more selling in the coming days.

I see there are now a lot of folks inquiring about the shift out of the brokers.

I stated here last

Thursday morning that I believed we were witnessing a shift from the brokers to the banks. I still believe that is what's occurring although the brokers are getting awfully oversold in here.

But what I wanted to show was that while everyone is focused on the likes of

Lehman Brothers

(LEH)

,

Merrill Lynch

(MER)

and

Goldman Sachs

(GS) - Get Report

, no one seems to have noticed that

Legg Mason

(LM) - Get Report

made its high back in February! Take a look at the chart.

Monday's action completed the head-and-shoulders top that has been building in this stock for six months now. The H&S top actually measures to just under $100. The stock is quite oversold and ought to bounce (as is the case with the others in the group), but bear in mind that this top is not small, nor is it minor. I expect Legg Mason is simply several months earlier than Goldman, Merrill and Lehman.

In other words, they will rally again, but the process of building the tops has now begun. Don't forget, it took Legg Mason three months to collapse after it made its high.

In fact, if you flip the chart upside down you might think you were looking at a bank stock -- so many of them have big bases they are now just emerging from.

Overbought/Oversold Oscillators

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

primer.

Helene Meisler writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At the time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback;

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