Monday, July 26, 2010

MCO Update

The reversal pattern continues to develop. The McClellan Oscillator finished the day with a +300 reading. This is in the overbought zone and offers the potential for a corrective move. The question at hand is how deep the correction might be. One factor to be considered is that the last overbought peak was in the +250 area and led to a fairly deep correction. Scanning across the chart to the left one might be inclined to think this would be the case again.

Two factors seem different to me this time. First, the MCO made higher highs this time (while the index didn't) which I interpret as a sign of increasing momentum on the upside. Second, the 10% Index finished at +668 which means that market breadth is very strong to the upside and that after any interim correction prices will move higher. At the previous MCO peak at +250 the 10% Index failed to get above +500 -- indicating that fewer issues were participating and that sentiment towards stocks still remained weak with sellers rushing in to unwind long positions. The initial MCO spike to +250 was probably short covering.

I would also note that sentiment measurements (AAII, II etc) are still bearish indicating that this rally has a ways to go on the upside.

The McClellan Oscillator
Click to enlarge

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