The stock market surprised many by opening strong Monday and closing with nice gains. On the NYSE there were 2159 stocks advancing and just 848 declining. In my weekend Forbes article "The Week Ahead: Overvalued Or Not - It Still Could Be A Tough October" I noted that "Stocks needed a strong close last week with good A/D numbers to signal a new rally phase was underway but this did not happen. A sharply lower close this week will turn the focus on the downside.."
When the daily NYSE, S&P 500, Nasdaq 100 and Russell 2000 advance/decline lines made new highs on September 22nd there was the potential for stocks to start a new rally phase. This would have been consistent with the bullish action from both the weekly and monthly A/D lines. This required strong A/D numbers last week but instead they were not that impressive even on up days.
Therefore I was quite surprised by Monday's Fast Moneys discussion about how stocks could now melt up from current levels. This was contrary to the outlook from daily A/D lines as the NYSE A/D line turned up Monday but did not move above its WMA or the previous two highs. The important A/D support, line b, was tested last week. In addition the NYSE just tested its downtrend, line a, as it needed a close above 10,750 to reversed the minor negative trend.
The action in the Spyder Trust (SPY), Powershares QQQ Trust (QQQ) or Russell 2000 advance/decline lines does not look any more impressive while the Dow A/D line looks weaker. It is also important that the new high in the Nasdaq 100 Monday was not supported by a new high in its A/D line. The SPY had a high of $216.69 Monday but then closed near the day's low at $216.08. This makes the support in the $213.60-$214 area now more important.
The S&P 500 A/D line turned up slightly on Monday but it needs another day or two of strong A/D numbers to move above its WMA and keep its trading range intact. A decisive break below the August and September lows will signal a deeper correction that could take Spyder Trust (SPY) down to the $210-$211 area.
Summary: The short-term deterioration in the market internals last week favored a more cautious not more bullish short term stance. This was the reason that Viper ETF traders were advised to tighten stops on long positions. The bullishness of the panel is also a concern as on February 23rd (Don't Follow Those Bearish Traders) as the stock market was completing a major bottom they were then decidedly bearish. This was when the Spyder Trust (SPY) was trading near $190.
In the defense of the traders the show's theme may have been solely the idea of the producers there was no strong argument from the traders against stocks melting up. A day of 2 or 3 to 1 negative A/D numbers will support the view that stocks are going to decline further. This I think will present a good buying opportunity.
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