Indigestion

After five up days in a row. I was probably remiss in not warning that Mondays correction could be severe but why ruin a holiday?

Most of us have never seen such an extreme market decline and there is something which can be learned from the current MCO behavior.

On the chart I've marked some price points P1 and P2 which correspond to the pullbacks which occurred when the MCO corrected from overbought levels above +200 (Points 1 & 2)

Generally speaking, in a 'normal' market a +200 reading on the MCO has bullish connotations. If the MCO moves above +200 WITH the 10% index rising from a corrective low above the -400 level, it is an indication that market breadth is very bullish and that prices are moving strongly higher.

In cases where the 10% Index repeatedly is going below the -500 level, especially in the very rare cases we are seeing now where the 10% Index has gone below -1000 it is clear that the market is very weak. In very week markets the MCO "correction" from the +200 level tends to be VERY SEVERE in terms of price loss and Mondays action proves the case. (Point 4)

In general the severity of the corrections can be inferred from the levels reached by the Summation index. Without sticking hard and fast numbers in the levels, I have generally found that when the SUM Index is "high" market rallies are strong, price movements in individual issues is exaggerated, a larger percentage move occurs. Conversely, when the SUM Index is "low" like it is now, market declines, including overbought corrections like Mondays, tend to be severe, individual issues make exaggerated high volatility moves to the downside. (Point 5)

Point 3 just points out that both the MCO and the 10% Index can stall at/near the zero line. Either this can reverse the trend, or just be a pause to refresh. In the current market, it's probably a good bet to assume the worst and that the markets will attempt to retest the lows again.

However, this nastiness is getting long in the tooth and yesterdays violent move to the downside might have been the bulk of the correction and that we could see an upward reversal sometime in the next few days.

The McClellan Oscillator for Monday 12/1/08
Click to expand

PS: (see chart in the previous post below) Gold decided that deflation was more likely than inflation and acted like a turkey Monday, so much for the 200 day test.