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Concerned an Oversold Rally Will Not Happen

I fear that the market will simply rally without having had a washout.

The Market

I want to begin with all this chatter about the so-called “death cross” in the Russell 2000. This is not news -- although, perhaps I have not used that phrase very often -- but I have harped for months about the 50- and 200-day moving average lines of this index and how they were on the verge of crossing and rolling over.

I could not care less whether we get a signal or not. But we already know that the Russell has been awful since the March highs and it continues to be the weakling of the markets. It’s not a matter of whether or not the signal works or doesn’t work. The point of it is to show the trend and at present all we know is the trend is—and has been down.

The contrarian in me wants to buy the Russell just based on the chatter about the death cross. But if you listen closely, what you hear is more folks scoffing at it than scared of it. And that I find that bothersome.

Let’s get to the statistics of the day though since there were some interesting ones. For the first time in what seems like ages, there were fewer stocks making new lows today than the day before -- even though the S&P 500 made a lower low than yesterday. That is good news. The next is that the ISE equity call/put ratio was under 100% again today. As I explained on Monday, this is not common and two in a row is even more uncommon. The last time I found two days in a row with this indicator below 100% was June of 2013. In that instance, the market tanked on day 3, and then it bottomed.

Prior to that, I had to go back to November 2008 to find two days in a row. Yes, that is how rare two days in a row is. Only in November 2008, it was three days. This means Day 3 was ugly, too. Day 4 was really ugly and then the market bottomed for a 10% rally.

Prior to that, it was March of 2008 and, again, it was Day 3. So the third day was down hard but that was the low; it did not need to go more than three days.

Now let’s move on to the McClellan Summation Index. It continues to point downward (the chart is shown below). At present, it needs a net differential of plus 3,900 advancers minus decliners on the NYSE to stop going down. Typically, my “line in the sand” is plus 4,000 for this. You might find this quibbling, and perhaps it is, but consider that one more down day tomorrow might accomplish a lot.

The put/call ratio is above 120%, so it might give us some real fear. It might even give us more than 90% of the volume on the downside. It might push that McClellan Summation Index up over 4,000 and maybe it would satisfy the ISE equity call/put ratio cited above. That really would be a decent setup for an oversold rally.

I fear we will not get it. I fear that the market will simply rally without having had a washout. And, if that is the case, then I believe the market will simply rally and come back down again rather quickly. I sense a rally on Wednesday will just give us some more complacency.

New Ideas

I was asked if I still like oil and the answer is yes, as long as U.S. Oil (USO) stays above $34. But I will not like it if it a) cannot rally or b) it rallies and cannot get above that downtrend line, which is currently at $35.

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As for EOG Resources (EOG), as long as it holds above $100, it should start to improve. If it breaks below $100, then that will complete one heckuva top, so I would not like it.

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Starwood Hotels (HOT) has got to hold $82. If it can’t, then it looks as though it will test $79-$80.

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Today’s Indicator

The McClellan Summation Index 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.

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Starbucks (SBUX) has completed a top but the top only measures to the $73-ish area. Perhaps it will start to hold that level. If it gets there tomorrow, that would be “Day 3,” which should be enough to get a short-term bounce out of it. But that’s the best I see at this point.

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Apple (AAPL) continues to look like it’s in a channel to me. At $102, the stock is trapped between the lower end and the upper end. Therefore, the stock is a buy when it tags the lower line and a sale when it tags the upper line. Until it breaks that channel, that seems to be the trend. I would say that it is likely AAPL will be a candidate for end-of-the-quarter markups when we get closer next week.

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With its pattern of indecision, KB Homes (KBH) is in a triangle. If the stock falls below $16.50 and gets a measured target near $13 and over $17.50, it will have a target near $21. One caveat: The farther it goes into the apex, the more apt it is to just keep meandering sideways. Therefore, the breakout needs to come in the next two to three weeks.

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