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Can This Oversold Rally Survive?

Nasdaq hits a new high -- barely.

The Market

Well, we got our oversold rally. The question is whether it can sustain itself.

There are a few things to point out. The most oversold areas are what rallied: the Russell 2000 and the transports. Let's talk about the Russell 2000, though, since that is where my focus has been.

To begin with, my favorite ratio, the Russell 2000 ETF (IWM) - Get Free Report to the Nasdaq-100 ETF (QQQ:Nasdaq), ticked up today. Oh, you probably still need a magnifying glass to see it, but tick up it did. You can see it took several weeks for it to matter in August.

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In early October, we saw Nasdaq shoot up to a new high (brown line) and net volume barely budged (blue line). I have circled it in red on the chart. I thought that was not good, as you might recall.

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Now notice that while Nasdaq eked out a new high -- "eked" being the operative word - - its net volume had no trouble making a new high. Net volume for Nasdaq was +1.28 billion shares, the best absolute net volume since Nov. 7, 2016 (the election). I consider this a plus.

In terms of sentiment, the American Association of Individual Investors bulls, in their weekly poll, slumped 15 points to 29.3%, the lowest reading since late August. I don't love this particular poll because they jump around like a bunch of day traders (I much prefer the Investors Intelligence poll, which is more scientific), but at least we saw a significant change in sentiment.

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Below, you will see the 10-day moving average of the put/call ratio. I expect it will peak and turn down in the next several days since in the last 10 days there hasn't been a reading under 90%.

So what's not good? Did you see the banks? After two green days in a sea of red, they were red today. I am still watching for signs of a head-and-shoulders top in that chart.

Also, we have the major indexes at new highs and the number of stocks making new highs remains quite tepid, especially on the NYSE with 120 new highs (recall just yesterday there were 150 new lows!).

The McClellan Summation Index is still heading down. It would require another day with breadth like today to halt the decline and another day of positive breadth after that to move it back up.

My guess is we don't run higher but we do start to see some improvement, especially in the Russell 2000. But if that improvement sours, it will turn me sour. I'd love to see a retest of the lows with fewer stocks making new lows, but will the market give us that?

New Ideas

We looked at Allergan (AGN) - Get Free Report a few days ago, noting that it seemed OK to dip a toe in, with the stop under $170 now. That remains the case, but it also needs to get itself up and over this small resistance at about $175. So far, these down-and-out stocks have had trouble getting over resistance.

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Today's Indicator

The 10-day moving average of the put/call ratio is discussed above.

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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.

We had a good trade on Apple (AAPL:Nasdaq) in late September when it filled that gap at $150. We had a target of $170-$175, which is what it reached. It hasn't done a thing wrong; it did fill the earnings gap yesterday, though. But I prefer a new pattern to develop before I have a strong view on it again. I'd call it a hold for now.

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Himax Technologies (HIMX:Nasdaq) has gone from an ugly chart at $9 (I thought it would bounce from there and was not thrilled with the chart but was clearly wrong in underestimating it) to a very decent chart now, having broken out today. The target is around $13.50-$14. Pullbacks toward about $11 should be buyable.

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Foot Locker (FL) - Get Free Report has earnings out tomorrow and I am not a fan of playing for earnings; it's often a crap shoot. In general, the chart is trying to make a bottom but it is still quite early. Unless it gaps up over that resistance at $37 on earnings, that's where I would expect it to fail.

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