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Getting Close to Overbought and Overly Giddy

Here's where we're likely headed and why I'm uneasy about the new highs.

The Market

Very little occurred in the market on Friday to sway me on my view that the market is on a path to get overbought in early July and have sentiment too giddy at that point. Let’s begin with a new data point, my Saturday Twitter poll, which you might recall saw a mere 42% looking for the next 100 points in the S&P 500 to be up last week, so the contrarians were correct. In fact, in the nearly 15 months I have been conducting this weekly poll, every single time the “downs” were in the majority the market has rallied thereafter.

But what about when they choose "up"? It’s more of a coin-toss. But this week the tally is for 60% on the upside and that has occurred eight times prior. I noticed something curious about those eight times. Let’s talk about the two occurrences in 2020, since they were both within weeks of each other, in the fall of last year. There are two blue arrows. Once came after a correction and a reversal. The market kept on going. The other arrived after the market had run (Point A) and there was very little gas left in the tank.

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The year 2021 has had many more bulls, so far. In early February, it was once again after a run and we saw one more week of rallying before we corrected. Look at A, B and C now. A and B both came right after a decline and reversal similar to late September. Some might say that Point C is similar to today, because it came on a new high. I wouldn’t argue too loudly, but notice two weeks later that was it, we ran out of gas in the short term. The same is true for the two down arrows (not labeled) on the chart.

The way I see it, when folks get too bullish after a move, the move tends to be closer to the end than the beginning. When they get bullish after a decline and a reversal, it is much better to side with the consensus.

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We have reviewed the DSI several times, so I will simply note that Nasdaq’s reading backed off on Friday, by virtue of being down on the day. Now the S&P and Nasdaq both stand at 85 and the Volatility Index at 14. If we do rally into the end of the quarter and early July, as I think we ought to, I expect these readings to be extreme by then. By extreme, I mean the DSI for the indexes will be around 90 and the VIX at or near single digits.

Usually when the market gets overbought and sentiment is too extreme we see a pullback. I expect that situation to show up in early July.

New Ideas

I want to step back today and take a longer term look at the chart of Bristol Myers (BMY) - Get Free Report. I have liked the chart for the better part of the last year and it has been lethargic at best. If it can ever get itself up and over that $68-ish area it will be a terrific breakout. It is what I have wanted to see for quite some time.

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I continue to eye the possible base being built in HollyFrontier HFC. It has done very little for months. A move over $37 should get it going.

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Today’s Indicator

One of my biggest issues with the market is the number of stocks making new highs. It remains a problem for me. We should not have new highs in the indexes and so few stocks making new highs.

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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.

Procter and Gamble (PG) - Get Free Report has literally done nothing for 10 months. It has resistance all the way up, so it’s not as if we see it clear $140 and the coast is clear, but I would say as long as it doesn’t crack under that $130 area, it should get the benefit of the doubt to work higher. In this staples space I have recently warmed back up to, Kimberly Clark (KMB) - Get Free Report looks like a big rectangle/base to me.

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Lumen Technologies (LUMN) - Get Free Report Is not a down-and-out chart that I usually like, but as long as it stays over around $13.50, it should keep rallying off this line. Be careful if it breaks the line.

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I have had very little luck with Transocean (RIG) - Get Free Report, because it seems like when it finally starts rallying the move in energy is close to over. For that reason I’ll say that it’s not so much where to stop out, but what to look for on the upside and that is a strong move over $4.80. A lethargic move over it and I’d get out.

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JOANN (JOAN:Nasdaq) is not typically a stock I would like, because it is up so much already, but it has shown a propensity to bounce off that uptrend line, so as long as around $14 holds, it should do it again. A break of around $14 would change that pattern.

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