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3 Areas of This Market That Need a Breather

Can the market keep rallying without a pullback? Yes. But here’s what I’d like to see.

The Market

Note: My mother is coming for a visit this weekend so there will be no edition of Top Stocks on Sunday. The next edition will be Monday evening, October 31. Happy Halloween.

Folks discovered the Dow’s outperformance today. Just as it is tagging that upper channel line. I still think it needs a pullback. Especially now that everyone is praising it!

Sure, breadth was positive today, which is good, but how many stocks look like you are dying to buy them here? They need pullbacks. There are too many that have run that are at resistance. We are overbought.

Can the market keep rallying without a pullback? Yes. But here’s what I’d like to see.

First, I’d like to see the DJIA pull back off that upper channel line (shown here last night). I think the Russell 2000 needs a breather, too. As does breadth. You see if breadth doesn’t back off we can’t get oversold (short term) again.

We have discussed the sentiment and my view that folks are getting bullish too quickly. We had more evidence of that today with the NAAIM Exposure up to 54. Recall it was 12 at the low a few weeks ago but I will call 54 neutral, not high. It got to 70 in August.

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We saw the AAII bulls move up 4 points to 26.6%. They were 32% in August. The bears dropped back too -- down 10, so again that tells you how quickly folks are changing sides. The bears are now 45.7%. They got to 36% in August but this current reading is down from 60% a few weeks ago.

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Now on to a more interesting sentiment discussion. The DSI for Nasdaq is at 20 and the S&P is at 18. I’m a little surprised the Nasdaq is not lower than the S&P but that’s what we have. Should we get a few more days of pullback those ought to get low enough to buy again.

I know everyone will focus on the Fed next week and the chance for a pause. I am not a Fed watcher so I have no idea what they will do. But if we can get sentiment a bit more bearish and the market a bit more short-term oversold then I suspect anything they say will be taken bullishly.

New Ideas

The question is where does one buy the QQQs, the Invesco QQQ Trust (QQQ:Nasdaq), into this downdraft. I would love to see them in that $267-268 area. Then the risk/reward is decent because under $265 and maybe you’re not wrong but the trade is less likely to work. Especially if the DSI falls much more and we can get back to an oversold condition.

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For an update on iShares 20+ Year Treasury Bond ETF (TLT:Nasdaq), the resistance starts around $98.50-99.00 (next week it is lower, closer to $98) from that downtrend line. It’s probably a good place to sell some for a trade. I am hopeful that the island bottom remains intact (as long as TLT stays over $94 it is intact).

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Today’s Indicator

The 10-day moving average of the put/call ratio is turning back up from 0.95. My best guess is it ticks up for a few days and then heads down again. But it, too, is telling us folks are positioned for more upside, not downside.

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Q&A/Reader’s Feedback

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Bank Of America (BAC) - Get Free Report has a decent amount of resistance here so I’m a profit- taker on a trading basis. The question is if I think the stock can revisit the lows. BAC doesn’t have a huge base (only a few months in duration) so sure that’s possible but I don’t think it would do so before the intermediate-term indicators are back to an overbought reading (later in November). The most bullish thing BAC can do is pull back to $32-34 and rally again and get through this $36 resistance. That would make a higher low rather than a revisit to the low.

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I have been lukewarm on Johnson & Johnson (JNJ) - Get Free Report as I thought back in September the stock could enjoy a rally to resistance. It is now chewing into resistance and will be smack at it around $175-176. I think that area will be difficult to eat through.

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I am, however, still a fan of AbbVie (ABBV) - Get Free Report. It’s got decent resistance right here but dips look buyable to me especially if they come down to that blue line ($148-ish currently).

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