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Don't Look So Down: A Bounce Should Come

My reading of several indicators appears to show a bounce should come, but it will likely be followed by another decline.

The Market

I don’t think we saw panic, but I think we got one heckuva rally in the Volatility Index off that Daily Sentiment Indicator’s single-digit reading. It’s always a tough call to say if the VIX has gotten jumpy enough to believe it’s “enough.” Take a look at the three times in 2019 that we saw the VIX get jumpy. The blue box is coming off that late April high for the sell off in May. Notice that the VIX peaked in the early part of the month, stocks rallied for a day or two and then came back down while the VIX went to a lower high.

The green box for the summer stock decline and VIX rally saw something similar, only there it was three lows in stocks and rallies in the VIX. Finally early October (orange box) saw the twin lows in stocks and twin peaks in the VIX.

Therefore, my conclusion is that we should bounce – there are other reasons listed below – but should come down again.

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So why the bounce? Well the McClellan Summation Index now needs a net differential of positive 2,200 advancers minus decliners to halt the slide, so it has stepped a toe into oversold territory.

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The S&P has been down for three straight days, which often means we are due for a green day. Nasdaq had its first three red days since September, and hasn’t gone four in row since early August.

But the new lows are rising again. There were more new lows than new highs on both the New York Stock Exchange and Nasdaq. They have not exceeded the prior readings – yet! – but rise they have.

The put/call ratio moved up to 113% Tuesday, the highest reading since it was 121% on Nov. 21 (just prior to last week’s rally). The 10-day moving average is still not high enough for me to be convinced there will be anything more than a bounce, though.

One final note on sentiment. The Investor’s Intelligence bulls, which typically tally through the prior week’s Friday, fell to 54.8% from 58%. That’s quite a bit. Keep in mind that is without any tallying of Monday and Tuesday. This means it is possible they could be back to 50% next week.

So don’t be surprised if we bounce to relieve the newfound cautiousness in the market. But we still need those indicators to cycle back to good oversold conditions and a bit more fear in the market.

New Ideas

We’ve had a nice rally in GLD since we looked at it last week with a more positive eye, but there is a lot of resistance overhead at $140. A pullback to fill the gap would be a good thing. It would help eat through some of that resistance overhead.

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Today’s Indicator

The McClellan Summation Index is still heading down, but the “what if” 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 do not see a reason to buy Deutsche Bank (DB) - Get Free Report here unless it miraculously gaps up and over $7.40, otherwise it rallies back to that $7.30-$7.40 area would be a good place to sell.

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Sociedad Quimica Y Minera (SQM) - Get Free Report is trying to form a bottom and it is very close to the lows, so if you want to take a stab, you know exactly where you are wrong (under that line). There is still a lot of resistance overhead but the stop is clear.

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Canopy Growth (CGC) - Get Free Report has become one of the most asked about names in our pages. It is possible it is flagging here. A move over that line would be a terrific plus because that downtrend has been in place for six to eight months.

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