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Getting to the Bottom of It All

A bottom is a process, not so much a place, and here’s what it will likely look like.

The Market

A week ago the question was if technical analysis can possibly work in markets like this. One week later the question of the day is: Is the bottom in?

As I have explained and will do so again, I believe bottoms are a process. They only look like an event after the fact, when that final low arrives. Generally speaking we are more apt to see a series of ups and downs. We got the big down. Now we’re getting the up. And when this is done, I expect we’ll see another trip down.

I am going to put that chart of 2010 in again to show you that even when the decline is not as severe as we just had, there is still a process ahead of us. I am not using this for an analog, meaning I don’t believe the chart is going to follow the pattern tick for tick or swing for swing but if I had to guess we are currently somewhere in that late May/early June time period. In other words: The first real rally off the low.

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As for today’s market, breadth was awful. Maybe awful is too nice a word. It was more like horrible. The S&P rallied 85 points and net breadth was positive 600. To put that in perspective, Friday’s decline of 88 points saw net breadth of negative 1,700. So while the S&P regained almost all that it lost, breadth didn’t come close to it.

The small caps and the Transports barely participated as well. And we’re a little overbought on a short-term basis.

On a positive note, the Volatility Index closed solidly red and on the low of the day, as did iShares Barclays 20-plus Year Treasury Bond (TLT:Nasdaq). And we are intermediate-term overbought. Quite frankly if the market can go down on Tuesday, I wouldn’t be surprised to see a rebound again later in the week, maybe even Wednesday, which is the first day of the new quarter.

We’re probably heading into that time in the market where the bulk of the rally is behind us, but we’re not ready to go down. Similar to the way those 2008 rallies went, there will be ups and downs now, not straight lines.

New Ideas

The Daily Sentiment Indicator (DSI) for oil is back to single digits, so maybe we can see oil rally in the next day or two. For that reason I’ve got my eye on Valero (VLO) - Get Free Report, because if it can rally and fill that gap I’d sell that gap fill around $54-$55.

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Today’s Indicator

The 30-day moving average of the advance/decline line is still in oversold territory.

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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 am not sure Energy Select Sector SPDR exchange-traded fund, XLE (XLE) - Get Free Report, can rally to fill that big gap up there at $40-$41, but I do think it can get to that $32.50 gap where that downtrend line comes in (around $33.50). If oil can rally it should help.

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The oil and gas exploration fund, XOP (XOP) - Get Free Report, is a different story than XLE because it is all the way back at the lows. If you want to speculate in it then the stop under $30 is clear and obvious.

If energy is going to rally, then the chances are higher early in the quarter because no one has to worry about showing it on their books.

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The ETF for silver, SLV (SLV) - Get Free Report, had a good run at more than 20% off the low, and I would now look for a bounce off that gap fill around 1$2.50 or just under.

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