1/ McClellan Oscillator Signals Potential Pullback
2/ Bearish Divergence Suggests Downside Risk for COST
3/ NKE Gaps Lower on Earnings, But Will It Last?
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1/
McClellan Oscillator Signals Potential Pullback
While the long-term breadth picture remains quite constructive, short-term breadth measures have taken a sudden downturn over the last week. I’ve found the McClellan Oscillator to provide an excellent picture of short-term breadth conditions, which can help to anticipate and confirm market pullbacks.
Based on the cumulative advance-decline line for the New York Stock Exchange, the McClellan Oscillator tends to fluctuate around the zero level. When the reading is above zero the short-term breadth is positive, and a reading below zero suggests negative short-term breadth.
Courtesy of StockCharts.com
I’ve shaded this chart of the McClellan Oscillator green and red to highlight when the indicator is above or below the important zero level. I’ve also included the S&P 500 index in the bottom panel for reference. Note how the two most recent market pullbacks in July and September were confirmed by a breakdown in this short-term breadth indicator.
It’s important to note that due to the overweight of the Magnificent 7 stocks and other leading growth names in our benchmarks, the S&P 500 can certainly go higher on weaker breadth as long as those mega cap names remain strong. But generally speaking, signals like the one confirmed this week suggest a pullback for stocks is a much more likely scenario.
2/
Bearish Divergence Suggests Downside Risk for COST
The chart of Costco Wholesale Corp. (COST) has been plagued by the dreaded bearish momentum divergences in 2024. This divergence occurs when price is making higher highs, but a momentum indicator like RSI is trending lower.
This bearish indication often occurs at the end of a bullish phase, when price is still trending higher, but the “buying power” propelling the price higher is beginning to dissipate.
Courtesy of StockCharts.com
Here we can see that COST has experienced two previous bearish divergences in 2024, before the March and July peaks. In both cases, Costco pulled back for about an 11.5% loss before resuming its primary uptrend.
If we would see a similar pullback for COST after the most recent bearish divergence, that would imply a downside target of around $820. It’s worth noting that a pullback of that distance would put Costco down around its August swing low as well as the 200-day moving average. While the long-term trend remains strong, the short-term picture seems less bullish until this divergence can be resolved higher.
3/
NKE Gaps Lower on Earnings, But Will It Last?
Nike Inc. (NKE) dropped about 6.8% on Wednesday after a disappointing earnings call. While this gap lower is certainly not an encouraging sign for investors, the move seemed to confirm the importance of a key resistance level.
The recent swing high for Nike, right around $90, represents a 38.2% retracement of December 2023 to August 2024 downtrend. This price point also line up fairly well with the 200-day moving average, currently sitting around $91.
Courtesy of StockCharts.com
Given that NKE remains above a trendline based on the August and September lows, as well as the 50-day moving average, I’m inclined to treat this chart as “innocent until proven guilty” on the short-term time frame. As long as the price remains above this trendline support, and the RSI holds the 40 level in the coming weeks, this appears to be a brief setup within a larger recovery phase.
From a longer-term perspective, the real issue for Nike is that price remains below a downward-sloping 200-day moving average. Until and unless NKE can regain this long-term trend barometer, investors are better off finding more constructive chart patterns elsewhere.
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Originally posted 3rd October 2024
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