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Breadth Just Can’t Keep Up

The rally is going on and breadth is not, but let’s take a look at the overbought situation.

The Market

Once again there is not much change in the indicators. The short term is just about maximum overbought and the intermediate term is not overbought yet.

Breadth has not kept pace with the rally -- it is still lower than it was a week ago -- but it has not been weak enough to roll over the McClellan Summation Index. And sentiment remains relatively subdued, at least for now.

Let’s start with the short-term overbought situation. My own Overbought/Oversold Oscillator will be overbought on Tuesday. That’s just the math. But it is the first time it will be more than “a little bit” overbought since we made the lows four weeks ago. That is very unusual, since coming off a low like that typically sees the first real overbought reading at around two weeks, not four weeks.

Now let’s talk about the Nasdaq Momentum Indicator. I have plugged in a 300-point rally in Nasdaq in the next few days to see what the Momentum Indicator will do. As you can see: It just goes down.

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If you squint hard, you can see that after the indicator turned down in late February, Nasdaq kept going for almost a week. I do not expect the same result this time, meaning I do not expect the market to collapse. I do, however, think we can see a loss of upside momentum in Nasdaq. Call it a pullback or a sideways shuffle for a few days.

The Intermediate term continues to be difficult to pinpoint its overbought timeframe. I have said the earliest I could see it was the end of this week. Now I’ll have to push that out a smidgen – the earliest I can see it is early next week. But it’s more likely going to be early May before the intermediate-term oscillator gets overbought. This chart gets shown here Monday evenings.

Let’s discuss the intermediate-term oscillator. I use the 30-day moving average of the net of the advance/decline line and so it’s the same concept as any moving average line where we look back to see what might transpire going forward. If we are staring at dropping a long string of positive readings, then the indicator has moved to an overbought condition. If there are still plenty of negative readings to be dropped, then it is still not yet overbought. That is where we are now.

Sticking with the 30-day moving average, but moving on to using it with the equity put/call ratio, you might recall that it peaked in early April. You can see it has barely backed off. For the next nine trading days, this indicator will drop some very high readings from early to mid March. In fact in the next nine trading days there are only two readings under 90% to drop. That means in the next two weeks we should finally see this indicator come down. As you replace readings over 100% with readings such as we saw on Friday (60%), the math says the indicator moves down.

Basically, it’s hard to imagine this sentiment indicator showing “too much bullishness” any time before May. If it gets readings hovering around 60% for the next 10trading days, this will fall down toward 65%, which is much more in the normal range, as you can see.

One more point, should the equity put/call ratio hover near 60% for the next 10 trading days, the 10-day moving average would fall toward 60%. Under 60% is when that shorter-term moving average finally steps a toe into “too much bullishness.”

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So, for now, I’d say we could/should see a pullback this coming week due to the overbought nature of the short term, but there is not yet enough weakness to look for more than that.

New Ideas

Someone asked me if there were any homebuilders I might like. Quite frankly, most look similar, but I have decided to highlight KB Home (KBH) - Get Free Report because you can see the risk/reward is pretty good. A break of $19.5 to $20, and you know you’re wrong. If it holds, then it could get to $25-$26, with $25 being the recent spike high and $26 filling that early March gap.

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I promised to look at the chart of Crude Oil and so let’s take a look. Using the continuous contract it is literally in the middle of nowhere with the potential for a double-bottom around $20 (and resistance at $27-$28).

But if we use the exchange-traded fund USO, it has come down to the recent lows. If it cracks under $4, you know you’re wrong. And with the Daily Sentiment Indicator (DSI) now at 12, if it did go lower in the next day or so the DSI would slip to single digits, which would/should lead to a short-term rally.

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Today’s Indicator

The 10-day moving average of the new highs minus new lows is flat over the last week. I expect an uptick on Monday, but after that, any down days would turn this back down due to the math. That would show a lack of upside momentum.

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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 would love to see the Energy Select Sector SPDR fund (XLE) - Get Free Report, fill that gap above. If it turns south and breaks under $30, I’d give up on it.

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Teck Resources (TECK) - Get Free Report looks trapped to me. It ought to bounce off that lower line and then run smack into trouble at the upper line. If it can fill that gap above (near $10) I’d be impressed.

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Alarm.com (ALRM:Nasdaq) has just filled a gap, so I expect it to fail somewhere between here and that line above (around $47/$48). If it goes further than I expect, I would not look for a move higher than $50-$52, because that is a measured target.

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Parker Hannifin (PH) - Get Free Report seems to be working this small channel for now. If it manages to tag the top of the blue channel in late April, it would also be running into the black resistance line, so I’d be in favor of selling it there.

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JPMorgan (JPM) - Get Free Report is similar to the banks we looked at late last week: bouncing off support, but still a lot of resistance overhead. So if JPM can get to $103-$105 it would be a good place to sell.

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