Last week's indicator review suggested that we were likely to see further weakness, given the strong downside momentum going into the week. We did, indeed, get a follow through to the downside, taking out the important lows from May and June. This turned the sector trends bearish and expanded the number of stocks registering fresh 20-day lows (middle chart) before Monday's solid bounce.
That bounce took us from a moderately oversold level in the Cumulative Demand/Supply Index (DSI) to a neutral reading (top chart). Note how downside momentum in the DSI did not confirm the recent lows, something we also saw in the Cumulative Adjusted TICK. I will be watching closely to see if price weakness going forward is increasingly accompanied by non-confirmations of momentum and strength. That would suggest that we remain in the range defined by the May/June highs and lows and could move well into that range from current levels.
I continue to view the market's action as more typical of a correction in a bull market than as the start of a new bear market. This is supported by the relatively modest correction in the advance-decline line specific to NYSE common stocks (bottom chart; mad props to the excellent and much recommended Decision Point site).
An expansion of new 20-day lows on subsequent market weakness would violate this scenario and point to a more significant market correction. I will be tracking that and other market indicators in my intraday Twitter posts (follow here) to gauge how we are trading within the extended market range.
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