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Can We Chop Our Way Out of This?

Here's my answer to a good question that readers are asking me.

The Market

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.

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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.

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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.

New Ideas

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.

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A few weeks ago I said I liked Southern Co. (SO) - Get Free Report in this $52 area and it has barely budged since then. I still think it is trying to base.

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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/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 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.

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Nomad Foods (NOMD) - Get Free Report needs to do more work sideways and stay over this $24 area. If it can do that, I think it can make a try for $28-$30.

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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.

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