On March 31, I posted a story about how the Nasdaq Advance/Decline Oscillator was predicting weakness.  The reason for using this oscillator is because it uses advance/decline data one step removed from price and volume action itself.  It allows an objective look at broad market data in relation to the price of the index.  As has been the case all too often during this liquidity driven up trend, buyers have swooped in at the first sign of weakness to push the indices higher, however there still has been no discernable improvement in the Nasdaq Advance/Decline Oscillator as price has appreciated.   Notice how the Nasdaq oscillator has made a lower high over the last few days and looks ready to turn lower here. 



Now let's take a look at the S&P 500 along with the broadly used NYSE Advance/Decline line.  In the chart below, the price of the S&P is plotted in the top pane while the NYSE Advance/Decline line is plotted in the bottom pane along with its 30 day moving average ( the red line).  Notice how as price moves higher, the advance/decline line moves higher along with it.   In effect, the A/D line is confirming the market trend.

 

Now if we take a look at the A/D line in a slightly different light, it is predicting that a pullback is ready to unfold.  The chart of the S&P 500 below has the same plots of price and the A/D line, but now I have added a momentum plot of the A/D line in the middle window.  The histogram plot is simply the difference between the A/D line and its 30 day moving average.  This, in effect, normalizes the A/D line over a 30 trading day period, which gives us a deeper look into the momentum of the A/D line.  Notice in the past how the histogram did not make higher highs along with price.  This was an indication that market internals were losing upside momentum.  This meant that there was less support for an up move in prices as reflected by market internals.  Now notice how the A/D histogram  has recently made a much lower high while price has pushed out to new highs.   



Now - for you Jim Cramer following perma-bulls out there, I am not calling for a major top here - not yet.  I am merely calling for a correction.  Could a major top develop here?  Absolutely, but one step at a time.  Even the most important tops start with simple corrections.  Once the correction develops, let's see how the selling progresses.  Patience is warranted as this rally grinds on.  It is time to lighten up on longs, but it is not yet time to short.