MCO update for 11/07/08

A couple of observations on the behavior of the McClellan Oscillator during extreme market conditions like the ones which we have observed over the last month or so. When the market is as severely negative as it has been, the 10% Index plunged well below the -1000 level. Since the MCO is the difference between the 10% Index and the slower moving 5% Index, when the market finally turns higher and breadth improves temporarily, the distance between the two Indexes shrinks which quickly moves the MCO to "overbought" levels.

A +300 reading on the MCO occurring on a rise from a less severe correction would be extremely bullish, indicating that market breadth had rapidly become positive. Unfortunately this is not the case we are seeing today and the positive momentum, the +300 level on the MCO, is occurring with negative breadth. Under these circumstances we should view the rally as being "corrective" and NOT the start of a bull leg higher.

I continue to remain bearish on the market but expect the rally to continue long enough to work off the oversold condition before declining again to retest the October lows.

The NYSE MCO for 11/07/08
Click chart to enlarge