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Bad Breadth Can Mess With Markets

It could get in the way of a last November rally.

The Market

And so it begins. Market breadth finally turned red and did so by a decent margin, considering the S&P 500 only lost a buck.

It was the worst day for breadth in seven trading days, which is saying a lot. On Nov. 17, the S&P 500 lost almost seven points, the Dow lost 100 points and the net breadth was +870. Today we saw the DJIA gain, the S&P 500 lose a mere dollar and net breadth was -700 issues.

Or even last Wednesday, the S&P 500 was down two on the day and net breadth was +360 issues.

So it always comes down to breadth. And poor breadth, in my view, leads to poor acting markets. For example, the McClellan Summation Index, which finally managed to lift itself up, albeit lethargically, had a cushion of -1,300 issues. This means it needed a net differential of -1,300 advancers minus decliners to halt its rise. After today's action, -400 will do it. So the cushion shrinks.

My work still says we have a few more days until we are back to an overbought condition. Curiously enough, it coincides with the last day of the month. I am not much of a seasonality player, but I suppose we could/should see another try upward into month's end. But if breadth weakens any more, this will become problematic.

There is one more indicator to discuss today. The put/call ratio for ETFs sunk to 41%. Wow. This is the third consecutive day with a reading under 100%, which tells us the bulls are getting persistent. There have been seven times since 2007 (when I began keeping this statistic) that this ratio has been under 60%, and five times we were close to a high in the market. The market did not correct immediately, but it did not keep on rocking upward.

The two times it did up rather than down, and up strongly, were in early and mid- February this year. So I checked to see if there were any other times we saw the ratio under 100% in the day before such a low reading. I see only two times. Once was mid-July 2016 and the S&P 500 essentially stalled out and went sideways until September when it finally corrected. The other time was early February 2009 when the S&P promptly dropped 10% in a month.

The bottom line is that sentiment is back to complacent and today breadth faltered. It's got a few days to correct this or I think those call buyers will not be happy.

New Ideas

Analog Devices (ADI) - Get Free Report is a stock we had good success with this year, having liked it in the upper $70s with a target of $89-$90. The action of late is quite wild, and that makes it look more toppy than anything else. It is down about 5% in the last week so it is oversold enough to bounce. I would sell/short it on a rally to $90-$91 with a tight stop over $91.

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Today's Indicator

The 30-day moving average of the advance/decline line will be back to overbought (I know, it barely lifted) later this week. The best I can tell is it won't be oversold again until closer to Christmas.

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Q&A

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.

Annaly Capital (NLY) - Get Free Report looks like a top to me. The only good news is that the price is so low that the measured targets aren’t very far away. For now, it looks like a stock that can trade between $11 and $12. I would have a better idea of it if there was a change in that range. A break of $11 would have me looking for a move toward $9.60.

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I am not a fan of Lumber Liquidators (LL) - Get Free Report, but I do think if it gets to $26 (red line) and fills that gap, it should bounce. It would also complete the measured target from the top.

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I am dying to like some of these down-and-out oil stocks but they continue to disappoint. Ensco ESV is another of these disappointments. I am not sure I trust it to hold that support around $5, so if it does I would be more interested in it. Otherwise it appears it can go sideways for a long time.

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