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Don’t Mind the Rumbling: It’s Just the Market’s Digestion

This is what an overbought market with good underlying statistics and breadth does.

The Market

The market started to run out of momentum about mid-morning and then spent the rest of the day trying to recapture it. That ‘s what an overbought market does.

Well, I should rephrase that: This is what an overbought market with good underlying statistics and breadth does. It digests.

Wednesday the market could be focused on the Transports. I wrote about them recently, noting I thought they should rally – and they did -- but at the same time I was quite concerned at their inability to make new highs.

With FedEx’s (FDX) - Get Free Report earning miss, we have some things to pay attention to. You can see on the chart that the $150 area is support. I would like $150 to break and then snap back, because that would tell me the selling is done. Will I get it?

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More to the sentiment point: Should the market be able to rally in the face of the FDX news, I think we will hear (probably non-stop) that transports don’t matter. And that probably takes us to giddy.

I mean, sure we’re close, but days like Tuesday are not what gets us there. The S&P 500 trading lethargic and flat on the day gets us the DSI back down to 81. We did get the Investor’s Intelligence bulls back up, this time to 57.7% – just shy of the 58.1% we saw prior to Thanksgiving. So the Investor's Intelligence readings are knocking on the door of euphoria now.

The put/call ratio sunk to 65%, so that finally showed a move toward complacency.

In any event, both the S&P and Nasdaq have been positive for five-straight days. There is no rule that says the sixth day must be red, but the S&P hasn’t gone beyond five days since the spring and Nasdaq hasn’t done so since early July. Both could use a rest.

New Ideas

Walgreens Boots Alliance (WBA) - Get Free Report has pulled back to the line I drew in, and it is getting mighty oversold, so it ought to bounce. But why has the market been up for five- straight days and this can’t even rally?

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Sticking with the transport theme, Delta (DAL) - Get Free Report, which I highlighted as a good chart a few days ago, is heading toward its first resistance in this $59-$60 area. A pullback toward $58 would be healthy and buyable.

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Johnson and Johnson (JNJ) - Get Free Report has had quite a run since I recommended it in the mid $120s. It is also up against some old highs. I wouldn’t be opposed to taking something off the table. I would like to see a pullback toward $140-$142 and a re-rally to see if this really is a top or a weigh station. Either way, it feels stretched to me.

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Today’s Indicator

The McClellan Summation Index is still heading upward.

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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.

The chart of Bausch Health (BHC) - Get Free Report had a terrific run and has given back some of the gains in recent days. That breakout measured to the $31-$32 area so the chart is doing what it ought to: correcting. For my taste, I would like to see it correct more or go sideways for a period to digest that near doubling since October. In the very near term, it ought to have a small bounce off that blue uptrend line ($28-$29). A move back under $27 would signal this correction is more severe than just a sideways digestion.

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Illinois Tool Works (ITW) - Get Free Report hasn’t done anything wrong, but it’s not my kind of chart, because it’s up too much (I prefer 3M (MMM) - Get Free Report in the industrial space now, or Alcoa (AA) - Get Free Report because they are still down and out). If the chart pulled back to the $170-$712 area I would be more interested in playing for a bounce.

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The question on the chart of Zumiez (ZUMZ:Nasdaq) is whether that gap up and subsequent filling of the gap is bearish. It isn’t, but obviously a gap and go is stronger than a gap and refill. But take a look at September’s gap up. Sure it kept going — for one day — and then it eventually came down and filled the gap In November). It ought to bounce since it must be getting quite oversold now.

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