Wait for the Pullbacks

I think intermediate-term indicators look bullish but wait for an entry opportunity.
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The intermediate-term indicators for the market, those that look out about three to six weeks, continue to improve. The cumulative advance-decline line, which measures market breadth has pushed ahead to higher highs and is now on the verge of pushing past its early November 2008 highs.

As I've explained before, I feel that breadth is the purest measure of what individual stocks are doing. The market averages, such as the S&P 500, give us a benchmark, but they are all mathematical calculations, often heavily influenced by just a handful of stocks or one group. So we tend to prefer a market where breadth is leading.

Presently, the S&P 500, which we've charted breadth against, is approximately 70 points (or about 8%) below its November 2008 peak, while breadth is hovering close to a breakout through those highs. I consider this to be intermediate-term bullish for the market.

Source: Helene Meisler, as of market close on January 8, 2009.

The McClellan Summation Index is intermediate-term bullish

I believe the McClellan Summation Index, an indicator based on the advance-decline line, is also intermediate-term bullish for the market. Generally speaking, as long as that index is rising, the market tends to have an upward bias as well. Conversely, when it is declining, the market tends to have a downward bias. As it stands, I think it would take a major decline in the market to find this indicator reversing course from up to down. I also find that when this indicator crosses the "zero" line, there tends to be more fuel left in the rally.

Source: Helene Meisler, as of market close on January 8, 2009.

The 30-day advance-decline line is similarly bullish

Also benefitting the intermediate area of the ledger is the 30-day moving average of the advance-decline line. I believe it has now reached a maximum overbought reading, or hit peak short-term momentum, which in the very short term is not bullish, but is bullish for the intermediate-term in my view. This indicator, like all momentum indicators, is about levels. If the indicator makes a higher high, it would still be required to come down and make a lower high before it could give us a negative divergence reading.

On the chart below, I boxed off in red what I mean by a negative divergence. In this case, the S&P 500 made a higher high while the 30-day moving average of the advance-decline line did not. Boxed off in green in the lower right is the positive divergence we got in late November 2008, when the S&P 500 moved to a lower low and the 30-day moving average of the advance-decline line made a higher low, giving us a positive divergence.

Source: Helene Meisler, as of market close on January 8, 2009.

Overbought in the short-term--look for a pullback soon

So that's a look at the intermediate-term picture in my view. The shorter term has a few more issues. I think we are now overbought in the short term, which typically means we should look at some sort of market pullback week of January 11 to relieve the overbought condition.

Source: Helene Meisler, as of market close on January 8, 2009.

Don't chase the upside

In general, I think the market is doing well on an intermediate-term basis, but chasing the upside is not a good idea when we're so overbought. Last time we were this overbought we had a 7% correction. Typically, I would expect something along the order of 3% to 5% for a correction. Therefore, I think it is best to have patience and wait for the pullbacks to provide an opportunity for entry.

Important Disclosures:

Neither Ms. Meisler nor TheStreet.com is affiliated with Charles Schwab & Co., Inc. The views expressed here are those of Ms. Meisler, and do not necessarily reflect the views of Charles Schwab & Co., Inc. They are presented as a service to Schwab Active Trading clients. Schwab makes no judgment or warranty with respect to the accuracy, timeliness, completeness or suitability of the information presented. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Past performance is no guarantee of future results.

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  • Market breadth is hovering close to a breakout through its November highs, while the S&P 500® is around 70 points below its November peak.
  • Both the McClellan Summation Index and the 30-day moving average of the advance-decline line are intermediate-term bullish.
  • I believe we're so overbought in the short term that chasing upside is not a good idea--wait for the pullback to offer an entry.