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Heading Back to Overbought

We could still be looking at a high that's worth shorting sometime in early July.

The Market

I should really travel more often -- at least that's what the bears have asked of me! You have to admit, it is rather uncanny the way the market almost always seems to manage a sharp down day in my absence!

In any event, on a short-term basis, I thought Tuesday's decline did exactly what it should have. Let me explain. You might recall that in early June, I discussed an overbought condition. As time went on, it was clear that the market would not sell off, but at the same time, despite what feels like a market that just goes up, as of this morning we were essentially trading where we were in early June: We backed off and re-rallied. Often what happens is that we get some drifting down, and then a big down day is what gets everyone to notice it. As soon as they notice it, we rally again.

But aside from that, almost two weeks ago, I described, in great detail, how I thought we could play out the rest of the month. Sure, my description was too detailed and therefore more apt to be wrong than right, but the essence was that we'd have some downside and then in the final week of the quarter we would re-rally again. At the time, I explained that if certain things played out as I described, we could be looking at a high that would be worth shorting sometime in early July. I still believe we are heading there.

First of all, it looks as though we will finally be back to an overbought reading on both the short-term and the intermediate-term Nasdaq Oscillators in early July. Much of that depends on how things play out the rest of this week and early next week, but it appears we are heading in that direction.

Next up, the number of stocks making new highs is clearly still not confirming the highs in the market, as there are far fewer new highs at this stage than there ought to be, so the negative divergences are in place. The best example is on the Nasdaq, where we had a new closing high and 46 stocks making new highs. If that remains the case as we head into early July, then we will have the setup.

Finally, the 30-day moving average of the equity put/call ratio has sunk like a stone in the last few weeks, mostly because of all those readings under 50%. It has not yet tagged the lows of January, but it is heading there. I can also now estimate that sometime between July 7 and July 16, it appears this indicator will halt its current slide and turn back up. This would be another sign that there could be a high worth shorting for in a few weeks (chart shown below).

For now, I would still look for some upside attempts in the next day or so as we head into the end of the quarter.

New Ideas

About a week ago, I was asked to revisit the Apple (AAPL:Nasdaq) chart, since my view was that after the split, the stock would trend lower. When we looked at it last week, I had said I thought it would work its way down toward the $90 area and that it ought to bounce from there. It has come down to that $90 area, and it ought to have some sort of bounce. Should the stock break under $89, I would get concerned.

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As a follow up, someone had asked about eBay (EBAY:Nasdaq) recently, and while I was negative on it, I did note that it was at a previous low near $48. It hasn't done very much since, but I noticed this downtrend line on my chart and was forced to wonder if we might see a Tweet from Mr. Icahn that could push the stock up and over $50. There's a ton of resistance there, but if the stock gets over it, my guess is that a short-covering rally would be in the cards.

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As a heads-up, I believe we are in the early stage of seeing the semis leave their recent role as technology leaders. They might be what we look to short in July. I will have more on this in the coming days.

Today's Indicator

The put/call ratio is discussed above.

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Q&A

I continue to want to give the benefit of the doubt to the SPDR S&P Homebuilders ETF (XHB) - Get Free Report, the exchange- traded fund to be long the housing stocks, because the news continues to be negative, and the stocks don't really go down much anymore. That having been said, unless this ETF can scoot itself up and over $33, it is more likely to continue in the trading range it has been in ($33-$30).

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Maybe it's because XHB has some building stocks, not just homebuilders, I am not so sure I trust it. So If I wanted to be long a housing-related play, I go back to one of my favorites, KB Home (KBH) - Get Free Report. Here is a base with a defined breakout over $18 that if taken out should eventually measure to the recent high just over $20. Oh sure, that spike high at $19.50 will be very difficult to get through, but in general I like KB Home.

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Enbridge Energy Partners (EEP) hasn't done a thing wrong; it has acted great. The only issue I have is that I can only calculate a measured target around $36-ish. I'd call it a Hold up here.

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We have looked at Post Holdings (POST) - Get Free Report before, and I have not liked it because of that giant head-and- shoulders top. However, on a shorter-term basis, that was a nice spike low and bounce from that downtrend line. I suspect it will try to recover and in the end get stuck between $50 and $52, eventually rolling back over. I would consider myself wrong should the stock trade over $52 and hold it.

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