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A Labor Day Decline?

If we do rally again next week and sentiment gets giddy, here's what I see occurring around the September holiday.

The Market

The funny thing about rallies and declines is that when the market is rallying, and you say we should pull back, folks wonder what it will take to get a pullback. And, when the market is falling, and you say we should rally, folks wonder what could possibly make us rally. The answer is that if we had the reason, it would be priced in already.

I will leave the reasons for today’s decline to those who write such narratives. I simply know it seemed as if it was needed two days ago, but it delayed itself a day. We had gotten to those upper trendlines for the S&P and Nasdaq and the Russell 2000 had gotten to the downtrend line.

In addition to that, the daily sentiment index for Nasdaq had gotten to 90 for three- straight days. Well, today it backed off to 83. It doesn’t leave a lot of runway, but it did back off. The S&P is at 79 now. And the recent selloff in bonds has taken its DSI down to 70, a far cry from the 90 we saw a month ago.

There wasn’t a lot of selling in the market today, but breadth was pretty poor, enough so the McClellan Summation Index stopped going up again. This is probably one of the biggest negatives in the market, the inability of this indicator to turn upward and get going. I am still of the mind that a day or two of pulling back should lead to another rally. But at the same time, recall that as we head into the end of next week, my work says we’re back to an overbought reading. That means if we do rally again next week and sentiment gets giddy in a hurry I would expect the market to turn south again around, or just after, Labor Day.

That is the nature of the market we are in right now. A lot of ups and downs.

Note: I am on vacation for the next week. The next edition of Top Stocks will be Sept. 6.

New Ideas

With the very sad news from Afghanistan, today I was asked if there are any defense stocks that have good charts. The chart of Northrop Grumman (NOC) - Get Free Report could shape up that way. There is a lot of resistance from the spring in the $375 area, but as long as it stays over around $360, it should get the benefit of the doubt.

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Today’s Indicator

The 10-day moving average of the equity put/call ratio is heading down, which is one reason I think we can/should rally again next week, but if we do rally and this falls to the bottom of the page, then it will line up with the overbought reading near Labor Day.

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Q&A/Reader’s Feedback

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

The problem with APA (APA) - Get Free Report is that it hasn’t even managed to cross that downtrend line. If it does that, then it still has plenty of resistance at $18-$19, but that would be the first step in showing some improvement in the chart. If it can do that (big if) then at least it has a shot at developing a head-and-shoulders bottom.

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I don’t know what to do with Silicon Motion Technology (SIMO:Nasdaq), because it really should rally again, but I always prefer if they fill the gap below (near $64-$65 first. So I would buy some here, but leave some powder dry in case it drops to fill the gap.

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Verizon (VZ) - Get Free Report could not even rally when all those yield stocks rallied a few weeks ago and now it has broken down. It only measures to $53.50, but it’s not worth a bottom fish to me unless it can recapture %55 in a hurry.

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