Last week's indicator review suggested that we had put in a momentum top for the recent bull swing and that it would not be surprising to see a pullback prior to any further price highs. We did indeed pull back last week, taking most of the sectors out of their uptrends. This moved our momentum-based Cumulative Demand/Supply Index (top chart) into modestly oversold territory. Pullbacks in this measure have occurred at higher price lows and have represented excellent intermediate-term entry points thus far.
We've also pulled back in the number of stocks registering 20-day highs minus lows (middle chart); these pullbacks have similarly occurred at higher price lows since the March bottom and have represented excellent entry points. I expect this pullback to be no different, but would revise that assessment should we take out the early September lows in this measure.
The bottom chart, from the excellent Decision Point site, shows that we've pulled back in the advance-decline line specific to S&P 500 stocks. Note how the early September lows in the A/D line represents important support. As long as we hold above that level, I view the longer-term uptrend as intact; a move below that level would suggest more significant distribution characteristic of intermediate-term topping.
I will be updating indicators each morning before the market open via Twitter (follow here). At this point, nothing has occurred to change my view that we're seeing a normal pullback following a momentum peak and should see further price strength before an outright bear swing takes hold.
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