For the AD ratio-adjusted McClellan Summation Index (RASI), the +500 level is usually the line in the sand determining if market index prices will continue higher or top out. If the AD RASI decisively exceeds +500 before rolling over, it indicates an intermediate term initiation move where price continues higher as the AD RASI makes lower highs following the AD RASI high.
The NYSE common stock AD RASI topped out a +522 last week before rolling over, closing at +511 on Friday. Although the composite NYSE AD RASI (all issues) has only achieved a high of +381 thus far, remaining below the +500 level, it is encouraging the common stock AD RASI variant has surpassed this important level.
However, the current dilemma for the common stock AD RASI's foray above +500 is can it continue? A failure to continue higher following the current consolidation or correction (take your pick) will result in trouble ahead for prices.
Since the current bull market began in late 2002-early 2003, there have been three prior occasions where the common stock AD RASI has reached +500 and then hesitated, circled in green within the below chart. Two of the events were failures, one was a brief pause before the common stock AD RASI continued higher.
Digging a little deeper, taking a look at the common stock AD McClellan Oscillator (MCO) prior to the AD RASI +500 level events may provide clues in what to expect this time.
The chart is a bit messy due to an attempt to highlight the common stock AD MCO action following a consolidation/correction period after the +500 AD McSum level was achieved.
1) Associated with the common stock AD RASI "+500" failure in July, 2004. The AD MCO came off an oversold extreme of -104 in May 2004 and the MCO immediately rallies to a very high level of +83. Such MCO patterns are almost always failures for price, and the SPX obliged by making a lower price low in August 2004.
2) Associated with the common stock AD RASI "+500" minor correction in September, 2004. In August 2004, the common stock AD MCO reached an oversold extreme of -91, rallied to its zero line resistance, corrected to -72 positively diverging with price. The common AD MCO then decisively exceeded the important +50 level propelling the AD RASI to over +500 in late September 2004.
The common AD MCO then corrected with a simple structure (no zig-zag below zero) and rallied back above zero forming a hook in the McSum finding temporary support at McSum +500. However, the ensuing rallied failed to propel the common AD MCO above the important +50 line, which resulted in another correction in the MCO and AD RASI, which fell below +500 before blasting off to nearly +1200 in December, accompanying a robust price rally.
3) Associated with the common stock AD RASI "+500" failure in March, 2005. This AD RASI failure was part of a counter-trend rally following the December high. The common AD MCO failed to surpass the +50 level in February, corrected below zero with a simple structure, then rallied to a lower high of +40 in early March 2005, well below the +50 MCO threshold. Predictably, prices followed lower after the failed AD RASI/MCO attempt at a successful counter-trend rally.
4) The current common stock AD RASI run above the +500 level is based upon a stronger foundation than the failures described in the (1) and (3) examples:
a) The common stock AD MCO bottomed at -77 in October, 2005, an oversold level, but not an extreme level usually followed by lower price lows 2 to 4 months later. In addition, as price continued to test its lows over the following couple of weeks, the common AD MCO posted higher lows.
b) On November 2, 2005, the common AD MCO decisively exceeded the important +50 level with a posting of +66. The AD MCO high was followed by a test of zero, then rallied to a nominal higher high at +67, again, above the important +50 level associated with the common AD MCO.
Following the common AD MCO higher high in late November, the MCO has has has posted lower highs as well as a lower low late last week below the zero line. The near term key for the bullish case is for the common AD MCO to rise above zero again leaving another simple structure below zero in its wake.
Although the current common AD MCO has built an encouraging foundation for the bullish case, there are flies in the ointment including the failure of the common cumulative AD line to confirm recovery price highs (see Fib's breadth update post this week).
The next week or two will be an important juncture with respect to liquidity as measured by breadth behavior. The MCO initiation thrusts achieved in mid/late November must be respected, since such thrusts are usually sufficient to propel prices higher for a two to four month time frame going forward. Only one month has elapsed since the MCO thrusts, thus more price upside should be in the cards, and the common AD McSum will likely not fall into the +500 "failure" archives.
In the fullness of time....