Skip to main content

Here’s What We Don’t Want to Happen in This Market

These setups -- such as the S&P rallying while breadth falters -- could lead to divergences better avoided.

The Market

The chop continues. That means we continue to work off the overbought reading, and it helps sentiment cool off as well.

But let me explain what we do not want to see: The S&P 500 rally while breadth falters. The S&P was up marginally by 2.16 points on Wednesday, for example, and breadth was marginally negative at minus 300 issues. That starts to set up negative divergences.

In addition, the McClellan Summation Index stopped going up. It only needs a net differential of positive 200 advancers minus decliners to send it back up, but if we see the S&P rally and breadth falter, that will cause a divergence between the Summation Index and the S&P.

As long as the Summation Index is rising, it means the majority of stocks are rising. If it is falling, it means the majority of stocks are falling. So if the S&P rallies and the Summation goes down, it is a negative divergence. It is also what set up the May and July highs and subsequent corrections.

What else do we not want to see? The number of stocks making new lows expand. Nasdaq, for example, saw 76 new lows. That’s double Tuesday’s reading. For now, the 10-day moving average of new lows for Nasdaq continues to just mill around, but if we see continued higher readings for stocks making new lows, the 10-day moving average will rise and that tends to be the precursor to a larger correction.

Notice the 10-day moving average of new lows for the New York Stock Exchange is also milling around, and doing so at a higher level than it did in September. Again, you do not want to see this turn up.

Image placeholder title

You also do not want to see the small caps underperform the large caps. When this ratio of the iShares Russell 2000 exchange-traded fund (IWM) - Get Free Report/SPDR S&P 500 fund (SPY) - Get Free Report goes down, markets tend to go down with it.

Image placeholder title

What you’d like to see is sentiment get scared in a hurry on a down day. Wednesday, the put/call ratio was 95%, so folks got a little scared. The problem is that the 10-day moving average of the put/call ratio is turning up, which is also a sign we are overbought.

For now I still think we’re just working off the overbought reading and the high level of bullishness we saw earlier this week that should see the market chop or pull back. But if these indicators roll over, I will become more cautious.

New Ideas

I have written about Johnson & Johnson (JNJ) - Get Free Report a few times of late. Each time it backs off, I think it becomes attractive. It has now filled the gap from last week and I think it is attractive once again.

Image placeholder title

Today’s Indicator

The Volume Indicator is at 52%. It’s neutral at this level.

Image placeholder title

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 can’t recall the last time we looked at Costco (COST:Nasdaq), but I know I liked the stock and I still do. It obviously needs to break out, but if it can do that the next target is in the $320-$325 area. Earnings are about a month away.

Image placeholder title

I keep waiting for Verizon (VZ) - Get Free Report to come down and tag that line for the spot to buy it. It’s possible I missed it this week, but I really would prefer to see it at $59 to buy it.

Image placeholder title

Occidental Petroleum (OXY) - Get Free Report has been in this channel for the majority of the year. It tagged that upper line and immediately retreated, so I suppose the lower line is back in play now. As you can see it is literally off the chart. The one thing that could give us another bounce sooner than that is if that blue line provides support. A bounce off there could send it back to the upper line again. One thing I would be aware of, however, is this will be a candidate for tax loss selling as we head into year end.

Image placeholder title
Dow is the Most Vulnerable to Profit Taking

Dow is the Most Vulnerable to Profit Taking

Despite the newfound focus on the Dow Jones Industrial Average last week, it turns out we may be seeing the last gasp of outperformance here.

How Hungry Is This Market?

How Hungry Is This Market?

Here's what I'd like to see happen with this rally -- I'd like it to show some FAANGs. Here's why -- and a look at Microsoft's chart, news highs and more.

Sloppy With a Chance of Rallying

Sloppy With a Chance of Rallying

Here's why I see another rally before the weekend, even amid the messiness, and a bump for Amazon.

Sloppy With a Chance of Rallying

We Can Rally Just a Bit More

Energy stocks have a lot of complacency in them.