How To Spot A November Correction

Even though the weekly NYSE advance/decline numbers were negative last week a majority of the weekly A/D lines are still above their WMAs.  This is a positive sign for the stock market’s intermediate term trend but does not rule out a correction.

Though several warned of a correction in October those warnings have all but disappeared. In last week’s article “When Was The Last Real November Correction?”  I examined the last pertinent November corrections to see if there were any common warning signs. There are now more signs of deterioration in the market internals which when combined with the widespread bullishness has me watching the market internals closely every day.

The weekly chart of the PowerShares QQQ Trust (QQQ) shows that it had another strong gain last week of 1.3%.  The weekly starc+ band is at $155.48 but as I mentioned last month the SPDR Dow Industrials (DIA) closed above both its monthly and weekly starc+ bands in October.

The 20 week EMA has been a good measure of support for the PowerShares QQQ Trust (QQQ) as it was last tested over a year ago.  It is rising strongly at $145.48 which is 5.6% below the market. The weekly Nasdaq 100 A/D line made a new high on October 20th (line 2) but has not made a new high since then. It previously peaked on July 28th before the market pullback in August.

Despite the further new highs this week only the daily Dow Industrials  A/D line made a new high Monday to confirm the price action.  The Spyder Trust (SPY) has made a series of new highs (line a) since the S&P 500 A/D line peaked on October 20th (line 1).  The first short term support is now at $256.

The S&P 500 A/D line is rising gradually and though it is still above its slightly rising WMA it is still well below the October high. A drop below the late October lows in the S&P 500 A/D line will confirm the negative divergence. This could mean a drop in the A/D line to the stronger support at line c.

The daily chart of the NYSE Composite reveals the twenty day trading range (lines a and b) since early October.   The support going back to October 9th is at 12,280 which is less than 1% below the current levels.  The slightly positive A/D ratios on Monday did push the daily A/D line back above its WMA.

There are no clear negative or bearish divergences in the NYSE A/D line as there are in the S&P 500. In over thirty years of working with the A/D lines divergences are not mandatory before the market corrects. A drop in the daily NYSE A/D line below the support at the October lows, line c, will move it into the corrective mode.

In early afternoon trading Tuesday (November 7th) the declining stocks on the NYSE lead the advancing stocks by a margin of 1753 to 1193. It would likely take two consecutive days of similar A/D ratios to push the A/D lines into the corrective mode or one day of 3-1 negative A/D numbers.

By monitoring the A/D ratios you should be warned of a market correction well before many of the pros on Wall Street who seem to keep raising their upside targets for the S&P 500.

In my Viper ETF Report and the Viper Hot Stocks Report, I share my A/D analysis twice each week and give specific buy and sell advice for ETFs and stocks. Each service is only $34.95 per month and can be cancelled on line.

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