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Charting the Beginnings of a Failure

By Helene Meisler
Special to RealMoney.com
11/11/2002 08:54 AM EST

Last week was certainly a case of all the good news being priced in, wasn't it? First, the Republicans swept the elections Tuesday, then the Fed announced a larger-than-expected rate cut Wednesday. The market exhausted itself on the news.

Remember when Intel (INTC:Nasdaq - news - commentary - research - analysis) didn't make a new low on its bad news a few weeks ago, and we had to give it credit for having all the bad news priced in? In the same way, we now must watch for stocks that no longer care to rally on good news.

For example, Qualcomm (QCOM:Nasdaq - news - commentary - research - analysis) couldn't manage to make any progress on its better-than-expected earnings report last week. And many homebuilders failed to rally on the bigger-than-expected rate cut last week.

We also had a problem last week when the Nasdaq made a higher high than the previous week, yet its oscillator didn't make a new high and instead failed at a lower high. That is a negative divergence.

Besides that negative divergence, we also had a failure in the number of stocks making new highs. On Wednesday, when the averages zoomed ahead late in the day and made new closing highs, the number of stocks making new highs on both the New York Stock Exchange and the Nasdaq failed to increase or surpass the previous high reading. This is a very short-term indicator, but it's always worth noting when it fails.

So we've got the beginnings of failures. I say "beginnings" because the market rarely turns on a dime, especially when it's going from up to down. (Lows are more often made in one day, whereas highs tend to take several failures.) Some of the intermediate-term indicators are nearing levels that say the rally is late as well.

For a few weeks now, I've discussed the 30-day moving average of the net of the advance/decline and stated that it wouldn't peak until the week of Nov. 18. I still believe that to be true. But you can see from the chart that it's almost back to levels at which the market has trouble making much progress.

On a one-day basis, Friday's put/call ratio was the highest we've seen in almost a month, so plenty of folks were getting nervous about locking in profits. A high put/call reading is typically considered bullish, but that is day-to-day and moment-to-moment stuff.

I prefer to view this indicator on a 21-day moving average. And this chart also says the rally is getting late. By midweek, it ought to halt its decline and begin to reverse course. Rallies come when the indicator is at the top of the page, not when it's near the bottom, which is where I expect it to be by the middle of this week.

I don't believe market rallies turn over and fail immediately; I believe they take several attempts to fail. And that means there should be more attempts at rallying before we come down, especially now that the Nasdaq has filled that gap it left from a week ago. But the intermediate-term indicators, along with the oscillator's failure last week, are telling us that momentum for this rally is waning.
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