Which Side of the Red Line Are You On?

Was it just two weeks ago there was so much talk of a breakout in the S&P? That's the thin black line you see on the chart of the S&P below.

But there is also this uptrend line that I have drawn for you so often that you, like me, probably see it in your sleep. That finally broke on Wednesday. That is actually good news. More on that in a minute. First, the red line. That is a support line that was broken for a few minutes before it was recaptured. The bulls will see holding the red line as a positive; the bears will see a rally to the 2090-2100 area as a throwback rally to the underside of the broken uptrend line.

There are those who think all is fine unless and until we break under 2040, which would be 4% from the highs. Let me ask you to spend a minute imagining this chart with a move down to 2040. The reality is that if it does it in a straight line, folks will panic well before we get there.

Now let's move on to the indicators. We are oversold. We are not as oversold as we could have been had we managed to close smack on the lows. In fact, let's note that the S&P is barely off its highs and we are as oversold as we were in mid-March when we had a much more significant decline in the S&P. There is a series of lower highs on this indicator, and a lower low is entirely possible now. A lower low in the Overbought/Oversold Oscillator would signal more weakness since lower lows need to be tested at some point in the future.

However, the real sign of weakness comes from the market's breadth. It has made a lower low. In Box A you can see that breadth (blue line) has made a lower low while the S&P (brown line) has not. That is a negative divergence. We have not seen such a negative divergence since last summer and fall.

Circle B on the chart shows the blue line (breadth) making lower lows while the S&P made a minor new high. You can see that the end result was October's slide.

Must this culminate in a slide like October's? Of course not. What we have now is an oversold market where the NYSE saw an increase in the number of stocks making new lows, but Nasdaq saw a minor contraction. However, since the intermediate-term indicators are all still pointing down, I believe the correction is not yet done.

For example, the McClellan Summation Index is still heading down and Nasdaq's has made a lower low. The put/call ratios have seen their moving averages turn up (bearish) and do not yet show signs of petering out on that path and turning back down.

So let's see if we can rally and let's see if that resistance in the 2090-2100 area halts the rally. That is how I see it playing out for now.

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