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Beware of Digestion and Chop Markets

The market has reached a short-term overbought condition. Now it’s time for digestion and chop.

The Market

I really think we are at that point where we’ve had a great rally off the lows, but there is resistance overhead. And even if some areas are at higher highs, most are marginal at best. The market has reached a short-term overbought condition. The sentiment got a bit frothy. And now it’s time for digestion and chop.

And digestion and chop are to me, the worst kind of markets. When sentiment is too bullish it is easy to want to fade it. But if breadth is still good it is rarely a good idea to fade the market just because everyone is in the pool. If or when breadth starts to weaken and sentiment is too bullish, that’s a good time to fade the market. But otherwise, it seems this is no time to be dogmatic about either side of the market. And breadth is still okay. Friday the Russell 2000 and the S&P 500 lost points — I consider that good since it cooled off the sentiment — and breadth stayed flat. Sentiment got a mite more cautious as the equity put/call ratio chimed in with a reading of .53, its first reading over .5 in nearly two weeks. Even the Daily Sentiment Index backed off with Nasdaq back at 77 and the S&P at 82. The CBOE Volatility Index went up a smidge to 15. So basically the way I see it, Friday cooled things off a bit, which is what a breather is supposed to do.

This week might be one of those volatile weeks that chops you up. We’ve got earnings from all the big tech names — the index movers. We have the end of the month at the end of the week. And folks will or ought to begin anticipating the tapering announcement from the Fed in early November. Speaking of tapering, I am certainly not a bond expert and definitely not a Fed expert but the yield on the five-year note measured at 1.2%-1.25% and it tagged 1.21% Thursday so it’s awfully close. On Friday, Fed Chairman Jerome Powell made some hawkish remarks and still bonds didn’t collapse. The iShares Barclays 20-plus year Treasury Bond ETF (TLT: Nasdaq) actually rallied. We have looked at this line before on TLT and I still see it as a good one. As long as TLT stays over this level, I am neutral on bonds here, leaning toward a rally, although I’m not sure it is a long lasting one. Maybe just enough to get it out of the woods.

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One final note is that the number of stocks making new highs increased on both Nasdaq and on the New York Stock Exchange — although many of them were those triple-counted SPACs. But while the number of new lows on the NYSE remained very subdued, over on Nasdaq they increased quite a bit, mostly with small biotech names and bond funds. Either way, the new lows and new highs must continue to be watched because a contraction in new highs and an expansion in new lows is a sign breadth would be waning. The charts are below.

New Ideas

United Parcel (UPS) - Get Free Report has had quite a run since I wrote it up positively in early October. My target is still that gap fill near $210. However earnings are out Tuesday morning, so if you don’t want earnings risk with the stock up so much, you might want to sell a portion of it.

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Trinity Industries (TRN) - Get Free Report had earnings last week and the stock milled around. Again, this is a base and as long as it can stay over that $28-ish area, I think it should work its way higher over time.

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Today’s Indicator

The new highs and new lows are discussed in full above.

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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.

I got not one but two questions on Boston Beer (SAM) - Get Free Report, and I must say it’s my kind of bottom fish. That top measures to $500 which is exactly where it has stopped. There was a nice outside reversal day on Friday, so now it just needs a push over $550 to further improve it. The one caveat is that if it can’t get going soon, it will be a stock that is ripe for year-end tax loss selling. But I think the risk/reward is pretty good here.

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CBOE Global Markets (CBOE) - Get Free Report doesn’t trade much, but it hasn’t done anything wrong. So as long as it stays over that $120-$125 area, it ought to work upward. Earnings are out on Thursday.

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I would like to see Freeport McMoRan (FCX) - Get Free Report pullback a bit, perhaps near $35-ish because I’d like to think that would give it a running start to get over that resistance at $38-ish. A pullback near that blue line would be a great set up.

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The iShares Silver Trust (SLV) - Get Free Report, an ETF to be long. Silver is intriguing because a pullback would make this look like a head and shoulders bottom and give it enough oomph to get through $23. Or at least that would be the expectation.

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