In a previous thread (Dissecting the US Commons: AD and Volume Lines), an explanation was offered in the division of the 4000 highest cap US Operating Companies Only (OCO) into four groups of approximately 1000 stocks each, designated as tiers 1, 2, 3, and 4.
This thread takes a look at the current McClellan Oscillator (MCO) configurations of breadth and volume for each tier. We'll start with the Advance-Decline (AD) MCOs.
First the Tier 1 group of largest cap US common stocks as defined by the Russell 1000 index (RUI) components. The Tier 1 AD MCO has chiseled out a complex structure below its zero line suggesting the sellers have been in charge over the past couple of weeks. A couple of attempts have been made by the Tier 1 AD MCO to get back into positive territory with no sustained success.
A MCO "warning shot" was posted several trading days ago, which is often a precursor to more trouble in the coming weeks, even if prices recover in the the near term. MCO warning shots during a price uptrend do not necessarily stop a price rally in its tracks, but usually do serve notice that an intermediate term price top will be coming in the next 4 to 6 weeks (if not earlier).
The Tier 2 AD MCO has yet to give a clear warning shot but is also having difficulties in sustaining more than a day or two in positive territory. Although breadth action usually precedes price moves, there has been minimal price damage thus far as measured by RUT, the most representative price proxy of the Tier 2 issues.
The Tier 3 AD MCO has exhibited stronger forays into positive territory than its Tier 1 and 2 cousins. Although a nice Tier 3 AD MCO spike recently unfolded into positive territory, it was a simple structure indicating the small cap bulls are not yet ready to take serious control again.
The smallest US common stock Tier 4 (NanoCap) AD MCO has actually crept into positive territory over the past couple of trading days, but needs to prove the bulls have taken control of this group by MCO chopping above the zero line. MCO congestion about the zero line almost always results in the MCO going into negative territory for awhile, so to avoid a crack in small cap price appreciation, the Tier 4 AD MCO will need to continue moving higher in the near term.
The Tier 1 (largest cap) traditional UD volume MCO is not behaving much differently from its AD MCO. The UD volume MCO also recently posted a possible warning shot for bigger trouble going forward. The large cap internals are definitely exhibiting a higher level of corrective behavior than the smaller cap issues over the past few weeks.
The Tier 2 UD volume MCO is in the same boat as the Tier 1 large cap UD MCO, except it has not yet given a warning shot by dipping significantly below the dashed brown line.
The Tier 3 traditional UD volume MCO has not shown the strength of its corresponding AD MCO, if measured by MCO magnitude, over the past few trading days. The Tier 3 components have yet exhibit any signs of a bullish takeover as measured by the UD MCO.
The Tier 4 (NanoCap) UD volume MCO, like its AD MCO, is acting like it may be positioning for a more prolonged stay above its zero line. This perceived underlying strength is still in the fragile stage, and will require follow-through in the shortened coming week... or every tier of US common stock UD MCOs will be voting for more price consolidation or declines going forward.
The Tier 1 (large cap) $Weighted UD ($UD) volume MCO is exhibiting weakness as well, confirming the UD and AD MCO warning shot signals. Compared to the smaller cap volume related MCOs, the Tier 1 MCOs have displayed weak relative strength, a concern for bulls since the Tier 1 components have significantly more volume than the smaller three tiers combined.
The Tier 2 $UD volume MCO is a virtual shadow of its traditional UD volume MCO confirming the bulls have not had the conviction or ammunition to take control of price action over the past few weeks.
The Tier 3 $UD volume MCO was able to notch a higher high last week, and now needs to remain above its most recent low to keep this promising MCO pattern intact. The bottom line, is this MCO, along with the rest of the tiers' MCOs, must climb above (and remain) above the zero line before allowing the bullish case much credibility in the near term.
The Tier 4 (NanoCap) $UD volume MCO is compressing around its zero line suggesting a more convincing move will be unfolding soon. Normally, chopping patterns about the zero line are patterns the MCO falls down from.
The large caps have been the leaders since the summer 2006 price lows, so with the current superior relative strength of the smaller cap internals, are the smaller caps positioning to take over leadership in another leg up? Or is the stronger relative strength exhibited by the smaller cap common stocks just a futile attempt of speculators positioning themselves for another perceived price move up?
There are plenty of signs (sentiment, momentum, sloppy price action) the bears will get their way over the next few weeks, but the new highs in the NYSE composite and common AD lines last week must be given consideration before getting too beared up at this time.