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Buckle Up: Choppy Waters Ahead

The retest usually comes after the fifth or sixth week of the rally and we’re only in week three.

The Market

When I said Monday that I thought Tuesday could be a down day, I will honestly tell you this was not how I thought we’d get it. And yet the overhead resistance and short-term overbought-ness have shown up.

The best news of the day is that despite the reversals, breadth stayed quite positive into the closing bell. This means the McClellan Summation Index is still rising. That chart is below.

In terms of the indicators, very little changed once again. We are short-term overbought, but not yet intermediate-term overbought. Sentiment got a bit effusive on an anecdotal basis on Monday and Tuesday, as I began to see a lot of calls that the low is in and we are now set for a “V” bottom, and that sort of chatter.

I am still of the mind that we are in a post-crash environment and that means there will be plenty of ups and downs — like a roller coaster. I also think we are going to retest the lows. My thinking has been that would come a few weeks out in time, perhaps longer, but I will leave open the possibility that I am wrong on the timing of a retest.

The reason I think it’s likely out in time is because typically the retest comes sometime after the fifth or sixth week of the rally and we’re only in week three. It often takes that long for the indicators to cycle through and for folks to become more comfortable with the market.

I do think the Volatility Index is overdue for a rally. I think it might even rally back to that downtrend line. But I am not of the mind that it soars back to the highs just yet.

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I would also draw your attention to the chart of HYG (HYG) - Get Free Report – the exchange-traded fund for high yield bonds. It failed to get over the late March high, which if that continues would be problematic and would, in my view, help set us up for the retest.

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A choppy market is what we have. I believe a choppy market is what will continue to be with us. At least until the indicators change.

New Ideas

I was asked if I could look at two ETFs to trade the Semiconductor stocks and why they looked so different than the actual index. My answer is that I do not use levered ETFs and therefore I am no expert on the way they trade. SOXS (SOXS) - Get Free Report, to be short the semis, is at a new low while the SMH (SMH:Nasdaq) or the SOX (SOX:Nasdaq) is not even close to a new high.

The chart of SMH essentially stopped right at resistance Tuesday, so it ought to back off, even if it makes another try upward, that should be difficult to crack the first time up there.

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SOXS is a 3x bearish Semiconductor ETF and I will say this: Often these 3x ETFs do not mirror their index counterparts. They often do not work well as charts, either, but if they did, then we should expect some sort of bounce from here. Resistance is heavy at $15.

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Today’s Indicator

The McClellan Summation Index is discussed above. It currently needs a net differential of negative 3,300 advancers minus decliners, which makes the market a little overbought.

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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 say that Alibaba (BABA) - Get Free Report has a decent amount of resistance starting in this $205 area and it goes all the way up. I’d be inclined to sell some here. The only good news is that when the chart tagged $170, it met its downside objective so pullbacks should start to show some base building going forward.

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I have so many charts that look like Invitation Homes (INVH) - Get Free Report, and the only thing I can say about them is they are a few weeks from the low and those lows should be tested and retested over time. I don’t know where I would buy this, but if I got lucky with a rally to $26-$27, I’d sell it there.

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Technically speaking, Dollar General (DG) - Get Free Report should hold here and rally again. But I don’t trust it. I simply have a hard time trusting a stock that is up so much off the lows in this market. You need fresh new buyers who want to dive in and that is unusual in this type of market. Now, if the stock can go sideways for some time, digesting the gains of the last week, then I might be interested in buying it, but up here I’m inclined to stay away or take some profits.

I would be more inclined to look at Target (TGT) - Get Free Report down here in the retailers, because if it maps out as I have drawn in blue, it shows a great deal of improvement and bottoming action.

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