Small Change In the McClellan Oscillator Suggests A Shoe To Drop

Stocks were very mixed on Wednesday.

NVDA and TSLA were soft. The Chinese stocks ramped.

Oil names jackknifed higher on the heels of Tuesday’s sharp declines while FANG dropped---NFLX sank, META rolled over after Tuesday’s strong showing. AAPL, AMZN and MSFT weighted down the day.

Precious metal miners were up smartly led by our FNV despite higher the 10-year hitting 4%

Tech was bipolar. FSLR, ACLS, and SMCI were up smartly while AMBA and ZM were taken to the woodshed.

After the bell CRM rocketed while SNOW melted.

There was a small change in the McClellan Oscillator on Wednesday.

This suggests a large price move is likely over the coming days.

With the failed rallies we’ve seen and the multiple closes below the SPX 50 day moving average, I can’t help but think that move is down -- especially with the SPX staring key support in the face.

The point is that should the key support at the 200 day ma (3940) be broken with authority, there is very little support it opens the door to the June low at the 3650 region.

That ties to the HIGH of the LOW BAR DAY… the October 13 low for 2022, the high of which was 3685.

As you can see, the SPX tested its 200 day moving average and barely bounced on Wednesday.

Last week it did the same thing at its 50 day moving average. It tested it on February 22 and bounced nicely leaving a large range outside up reversal day the next session.

However, that proved to be a trap door through which Keyser Soze entered the very next day as the index gaped down leaving a Reversal of a Reversal.

The Keyser left his mark on market participants psychology as every rally since that Reversal of a Reversal on February 24 has faltered.

The point is this: when a genuine reversal from a test of an important moving average such as the 50 or 200 day is on the table, in a bull, the market rages out of the turn. The train doesn’t back up to pick folks up her were late to get on board at the station.

That’s not how Mr. Bull rolls.

It’s not impossible that a backtest of the declining Bear trend line from the 2022 top is still going to be successful, but it looks like a full on flush out is brewing.

It’s not impossible that the mid to late March turn date setup is a high, but each day that goes by now, it looks more likely that cycles will exert their influence to the downside this month.

We now have 3 closes by the SPX below its 50 day ma out of the last 4 sessions with each of the last 4 sessions having closed below a trend line connecting the October and December lows.

There is another shoe to drop pointing to downside drama. That shoe yet to drop will be powerfully negative breadth.

Allow me to explain.

The following panel displays the Summation Index, SPX and the McClellan Oscillator since February 1.

Since Friday, the Summation Index has declined, SPX has declined, but the McClellan Oscillator has advanced.

Examining those three days in the circles above will reveal that.

In other words, this week the Summation Index fell and the SPX has fallen.

Those are signs of the Bear like gathering clouds before the storm.

What’s missing for a sharp decline from here?

Notice that the McClellan Oscillator is HIGHER for these three days, from about -62 to about -47.

Why is the McClellan Oscillator advancing this week?

This is because breadth has remained relatively strong.

The sharp decline will begin when breadth starts collapsing.

Alternatively, if the SPX can reclaim the channel on the above chart and rally decisively, it may point to a Bear Trap being sprung. In that case it opens the door for a rally to the 4270 region.

I’ll believe it when I see it.

To recap, the McClellan Oscillator registered a small change on Wednesday.

That typically points to a large move in coming hours/days.

We will be watching closely and will add to our SPY puts when the McClellan looks like it will close at a new low for the year.