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6 Charts to Watch

Can we quit this chop? How will Friday's fall factor into the likely action ahead? And what stocks should you be watching now? Let's dive into each of these questions.

The Market

Note: Helene Meisler will not be writing until Labor Day weekend, and will have limited access to emails from readers during that time.

I had pegged this coming week as the point we get short-term overbought again. But I clearly did not expect the market to head back down so soon. So, now I have two problems: Despite some positive divergences on Friday, we are simply not oversold, and it still seems too soon for the intermediate-term indicators to be at a good oversold.

That leaves me with a lot of questions about how this plays out. So here I’ll look at the positives, negatives and five charts you should watch closely. First, the positives.

There were fewer stocks making new lows on both the Nasdaq and the New York Stock Exchange on Friday, and by a fair amount. In both cases, there were about 100 fewer new lows for each exchange. We didn’t see a lower low in the S&P 500 or Nasdaq, but the Russell 2000 saw a lower low.

So what’s the problem? The problem is that if we plunge further, it’s hard to tell if there will be an increase or contraction in stocks making new lows. A plunge under 2840 in the S&P with fewer new lows would be a clear positive divergence.

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The Hi-Lo Indicator is still stuck around 24%. Under 20% and it is oversold. It doesn’t need to get there, but I feel more comfortable when it is.

Friday saw 90% of the volume on the downside. That typically means there was enough selling to get a bounce. Sticking with volume, the Volume Indicator is at 44% , which is into oversold territory.

The McClellan Summation Index is still struggling to turn back up. Neither of the two 100 point S&P rallies we’ve had in the month of August has managed to turn it up, only enough to halt its slide for a day. It now requires a net positive of 1,500 advancers minus decliners to turn upward. In that respect, a good day or two of breadth could do it. But at positive 1,500, it is not oversold (over 2,000 is oversold). Nasdaq’s McClellan Summation Index hasn’t even come close to halting the slide. My calculation is that it would require at least two good breadth days to do that.

The cumulative advance/decline line, using all stocks, but also using common stocks only did not make a lower low on Friday. So that has the potential to be a positive divergence as well.

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Now for the complaints.

The math behind the 30-day moving average of the advance/decline line, what I use as my intermediate-term Oscillator, doesn’t put it in a good oversold condition. I had noted when we discussed this indicator before the earliest I can see it as oversold is post Labor Day. I can refine that to about a week or so after Labor Day. And even then, the math is still questionable on how good the oversold condition would be.

Let me explain this: To get to a “good” oversold, we have to go down. But we have to go down many days in a row, that’s what gives us the set up. In the last few weeks, we haven’t had more than two red days in a row. That leaves the indicator in chop mode, not a “good oversold” mode.

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Then there are the charts themselves. The KBW Bank Index broke, rallied back and has come down again. It measures to 82 now, which is the December low area. Or do we give it credit for not making a lower low on Friday – get a microscope so you can see it.

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The Russell 2000 and the transports both eked out marginally lower lows. So do we say they are bearish, because of the lower low, or do we say, why wasn’t the new low a more serious break? The opportunity was there.

The 10-day moving average of the put/call ratio is high and Friday’s reading of 88% for the equities and 119% for total have kept it high. The American Association of Individual Investors’ weekly survey with the four week moving average of bears ought to peak when it is released later this week. That is typically bullish.

The other sentiment indicators I follow are not extreme, though. The Investors Intelligence bulls are at 49%. They were 42% at the May low, although I expect we will see this reading tumble when it is reported midweek this coming week. It was 29% at the December low.

Can the chop continue? By that I mean can we rally Monday and then come back down and keep doing this cha-cha-cha dance? I suppose we can, but I prefer a resolution, and I’m just not sure we have one yet. I’m not sure I would trust stocks if they rallied to follow through, nor am I sure I would trust them to have follow through on the downside.

Six Charts to Watch

Instead of offering “New Ideas” or even the “Q&A/Feedback” section in this letter, I am going to show you six charts I think we need to watch. There are plenty of others but these are a sample of what to look for.

One thing to note is that a break of these key levels followed by panic and a snapback is a positive, not a negative. It’s the break without panic that is a negative.

Let’s start with a bank, namely JPMorgan Chase (JPM) - Get Free Report. You can see the $104 level will be well watched. A break of that, and there becomes a measured target in the mid-$90 area. If it breaks and there is panic, and it then reverses and recaptures $104, and I’d consider that a positive.

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Johnson & Johnson (JNJ) - Get Free Report has been making marginally lower lows with no follow-through for nearly three months now. A break of this level would be a change in character with the next target around $122 to $124.

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We have discussed FedEx (FDX) - Get Free Report recently, so you know about this $150 area. I think everyone sees it, so the same rules on panic above apply. No panic, and the measured target is far away, around $110 to $120.

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Adobe (ADBE:Nasdaq), which I keep coming back to, continues to hover and refuses to break this $280 area.

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We looked at Facebook (FB:Nasdaq) recently noting this uptrend line, which has now broken and made a marginally lower low. If there is follow-through, expect to see some panic and hysteria in the $160 area.

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The Invesco/PowerShares QQQ Trust (QQQ:Nasdaq) had a rise in volume on Friday, which is usually the sign we will bounce in the next day or so, and like Adobe has refused to break. If it goes under $180, I think we’d get some hysteria. The issue is that the next support is $170 and there is also a measured target there. That is far away. The same rules apply on panic that recaptures the line.

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