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U.S. Stocks: "Telltale Divergences Between a Lot of Indexes"

Could there be a correction around the corner?

by Alexandra Lienhard
Updated: August 02, 2017

Robert Kelley, the editor of our U.S. Stocks Intraday Pro Service, weighs in on recent price action in U.S. stocks. He discusses a handful of significant indicators that he's watching and stresses that different indexes are tracing out very disparate Elliott Wave patterns.


Alexandra Lienhard: US stocks are either at all time new highs, or nearly so. Joining me, today, to offer some perspective, is Robert Kelley, the editor of Elliott Wave International's U.S. Stocks Intraday Pro Service. Hi, Robert. Good to see you.

Robert Kelley: Hi, Alex. It's good to talk to you, again.

AL: So, looking ahead -- up, up, and away, or are storm clouds approaching?

RK: We're seeing some technical non-confirmations and some sentiment extremes that we can talk about, that warn of a pullback coming here, over the -- probably lasting another couple of months, I would say, on the downside.

AL: Now, I'm looking at sentiment. Is the bullish sentiment also following the market to new highs? And furthermore, what is the message from sentiment, overall?

RK: Well, of course, it depends on which sentiment indicator you look at. I like to take quite a few of them together. And for example, we saw the 10-day put/call ratio, the CBOE put/call ratio, dropped to its lowest level since July 2016, back on July 25th. So that's a very significant benchmark sentiment indicator that I follow, that's saying sentiment is the most extreme, at least by put/call ratios, in a year. And the daily sentiment index is another one we track that it peaked at 92 in late February and early March. And it's been making lower highs. And that's a very normal type of pattern that we see, as rallies mature. And in fact, now, the daily sentiment index is 65, and below its 40-day moving average. And in my work, that's a pretty significant sign that a correction is probably right around the corner.

AL: Now, Robert if price action is "king," market internals are "queen," as the popular saying goes. So how does breadth look, overall, to you?

RK: Well, of course, breadth can be looked at in different ways. One measure, of course, is the advance-decline line, which is, actually, making new highs today, August 1st. And that is a sign, in my work, that we are not at the end of the bull market. It doesn't preclude a short term top, which we're expecting, but it says that, probably, there's going to be a correction, a new high in the market, and a breadth, A-D line divergence. But when you look at the different indexes, you've got very disparate patterns going on, right now. The Dow has made new all-time highs, again, today. The NASDAQ and the S&P, their peaks, as of this moment, are last week, and they're making lower highs. So you're seeing telltale divergences between a lot of the indexes. And right now, the speculation is concentrated in the Dow, for whatever reason. And that's usually a sign of the very late stage of a rally.

AL: And anything standing out in the ETF world for you?

RK: Well, we have some completed wave counts in some various sector ETFs that I follow, so that's sort of supporting my view that we're near an interim peak. And there is room for some further rally, but most likely, we're going to see a number of divergences in the ETFs on this final leg up in the bull market I'm expecting later this year.

AL: Well, Robert, as always, thanks for your time, today, in offering these insights.

RK: Thank you, Alex. Talk to you later.

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