Negative Divergences Aplenty

Tuesday was exactly the kind of market session we should have seen after the extreme overbought readings of last week. For a few minutes there, I was confused -- the market was acting normally!

In fact, do you realize the S&P 500 closed Tuesday at about the level it did last Thursday? This means the market has digested the overbought reading for three sessions -- so that reading is not a problem for the market. To reiterate what I've said in the past, when the market is overbought, an ensuing consolidation or pullback should normally lead to another rally. That subsequent rally is what matters more in terms of the indicators.

For example, right now we're seeing negative divergences aplenty on the NYSE. The number of new highs is far below the May peak, as are cumulative volume and the cumulative advance-decline line. The McClellan Summation Index is still rising -- which is bullish -- but it, too, is far below the May peak. The 30-day moving average of the advance-decline line is still oversold, but is also far below the high from May.

The intermediate-term oversold readings leave a window open for these divergences to work themselves out -- to improve. A failure to do so in that window is what can turn the market trend from upward to downward. In other words, for now, the market gets the benefit of the doubt as far as upside action is concerned.

In the meantime, several readers have asked me about my view on gold in the past few days. Well, my outlook hasn't changed much in the last few weeks. I had been able to calculate a measured target around $1,170 per ounce, and the price reached $1,179 -- so I figured that was enough. Gold then retested that level on the day the June jobs number was released, and I proceeded to looked for a rally toward $1,300, which was essentially hit last week.

I think $1,300 is quite a tough place for this commodity. Perhaps Federal Reserve chief Ben Bernanke will be rather dovish in his chat with Congress and gold will push through $1,300. If that happens, $1,350 will be the next resistance level, but that little bottom would measure toward $1,400.

As I noted last week, I felt strongly about a gold move to $1,300 -- I looked for it -- but I do not see much of an edge now. Failure at this level seems just as likely as success at punching through.

The chart no one asks about is that of copper, which has tried to make a small bottom. If copper gets through $3.20 per pound, I can see it rally toward $3.40. I realize there are a lot of marking on the chart, but Line A is the resistance at $3.20, and B is $3.40. There is a higher low in copper, and any move above $3.20 would constitute a higher high.

In Top Stocks, Helene puts her 20+ years of experience in technical analysis to work for you. Take advantage of Helene's time-proven approach and her action-oriented analysis of technical indicators.Try it now. Get a 14-Day Free Trial.

At the time of publication, Meisler had no positions in the securities mentioned.