Indicator Update for March 31st

Last week's indicator update concluded, "I would not be surprised to see consolidation following the strong price rise off the early March lows. That consolidation should be relatively flat if we're going to sustain another leg upward." Since that time, we did see further strength in the rally last week, followed by consolidation that took us beneath the 800 level in the S&P 500 futures.

The above charts show where we stood as of Friday's close, and we can see the double top in new 20-day highs minus lows (bottom chart), even as price had moved higher in the large caps. We can also see from the Cumulative Demand/Supply Index (top chart; a cumulative index of the number of stocks closing above versus below their short-term volatility envelopes) that we are at very overbought levels.

As I've stressed for several weeks now, these peaks in the Cumulative DSI (which is my preferred overbought/oversold measure) have occurred at successively lower price highs, which is characteristic of longer-term bear trends. We need to see an expansion of 20-day new highs and an ability to hold the 800 level in the S&P 500 Index on pullbacks before we can conclude that the current rally is something more than a violent bear market bounce.

To this point, rallies above 800 have been met with stiff selling, as we saw late in today's session. Should we see lower price highs on bounces in the Demand/Supply Index or should we see fewer new highs (and especially more 20-day lows) on bounces, I would be looking for a deeper correction into the broad trading range defined by last week's highs and the bear market lows. As always, I will be tracking Demand/Supply and new highs/lows daily via Twitter.
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