I want to address a question I got Thursday, and it’s one that I got from several folks, so it is clearly on readers' minds. Essentially the question was whether we can have an end to this correction and form a bottom in a chop fashion.
Often, my scenario is that the market makes a low, enjoys a rally, comes down, and makes another low, often a lower low. Think of a "W" pattern where the second "V" of the W is a lower low. On that secondary low, we should get positive divergences where there are fewer stocks making new lows -- where the Overbought/Oversold Oscillator makes a higher low and where sentiment is downright bearish, and where the intermediate-term indicators are oversold.
So the question is if we can deviate from that, where instead of the W pattern, we form more of a "U," where we go up and down up and down at a certain level (in this case, call it 3200, on the S&P) and form a low or end the correction that way. That is always possible, but it is still up to the indicators.
The 30-day moving average heads into an oversold zone in the next few days, so that’s one intermediate-term oversold condition in place. That chart is shown here Monday evenings. The Volume Indicator, which I typically show here on Wednesday evenings, was 47% this week and now it hovers just over 45%, so this indicator is fast approaching the topside of the oversold zone where 40% is grossly oversold and 45% is oversold.
The HiLo Indicator, which was 60% Wednesday, is now at 50%. It’s oversold reading comes under 20%. So it may get there in a matter of days as well.
We discussed sentiment in the previous letter, so the only update is the put/call ratio finally ended over 1.0. It was just barely over, but considering the day ended green, that is a big change from just a few days ago. It says for the first time that folks don’t trust the rally. As a contrarian, I consider that a positive. Down below, you will see the 10-day moving average of this indicator is finally back at the level it was in late June. As I noted Wednesday, we have intermediate-term indicators heading toward oversold, and we have sentiment turning more bearish and the more of that we get, the more I warm up to the market. My preference is always the W, but if the indicators line up, a U is OK, too.
I want to begin by noting that the Daily Sentiment Index (DSI) for gold is now 25. So this, too, is getting closer on a sentiment basis.
About a year ago, I was quite bullish on Clorox (CLX) - Get Free Report, and if we can consider anything lucky about Covid, it was that the stock went up. It has spent the last two months correcting, and I find myself once again warming up to it. There is resistance all the way up, so the only real level is crossing that downtrend line around $215, but that doesn’t really clear very much, except it alerts us that the correction is probably over. As long as the stock can stay over that $205 area, I think it is a good risk/reward.
The 10-day moving average of the put/call ratio is discussed above.
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I have never heard of the stock Appian (APPN:Nasdaq), but I find myself intrigued by the chart. It’s pretty clear if it breaks $55, you’re wrong to be long so the risk vs. reward seems decent here.
I am not a fan of the chart of Lithium Americas (LAC) - Get Free Report, because of the plunge it took from a new high a week ago. It probably finds enough support around $6.50-$7 to bounce, but notice how when it had a similar plunge in August it took weeks before it could rally again. If such a pattern shapes up again (see the “W”?) I might warm to it. You do not want to see it plunge and break this support zone.