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Here’s Why We Should See a Pullback Next Week

… At least on Nasdaq … and if you need a hint, check the big-cap tech stocks.

The Market

One of the questions I get most often is how the market can ignore the economy. First of all, markets often ignore the economy. Not for extended periods of time, but over the course of a few months it happens. In this particular case, everyone seems to have decided that the Fed has our back and that’s all that matters.

That’s probably why anything economically sensitive hasn’t been stellar since early June. Wednesday was no different, as the Russell 2000 ended the day solidly in the red and breadth was barely positive. That means that the McClellan Summation Index is still heading down.

I can only tell you that last Friday got folks wound up and bearish, as I noted here Monday morning. The put/call ratio had gone to triple digits, something it hadn’t done since that big down day on June 11, and that poll I took on Saturday confirmed that sentiment had changed. And, yes, the chatter on television had turned cautious.

Now there is no cautionary chatter on TV. It’s not just TV: It seems everyone believes the market will simply look forward. That might be true, but even this week’s rally hasn’t seen money flowing into economically sensitive names like it did back in May. Instead, big cap technology has been the recipient.

Keep in mind big cap tech is what moves the indexes. That’s why the fact that the Daily Sentiment Index for Nasdaq is at 93 Wednesday night and has me more confident that we should see a pullback next week, especially in Nasdaq.

The S&P moved up as well, its DSI is now at 85. So, if we get another up day on Thursday — remember the jobs report is out Thursday morning — then we could possibly see the S&P’s DSI over 90 as we head into next week. That would be the first such reaching over 90 since mid-January.

One more note on the DSI: The reading for the VIX is at 18, so a few more up days for the market could take the DSI for the VIX to single digits and we know that has led to a bout of volatility in the past.

Note: With the markets closed on Friday, there will be no Top Stocks Thursday evening. The next issue will be on Monday morning. Have a nice long weekend!

New Ideas

A few weeks ago when we looked at Square (SQ) - Get Free Report, I noted that there was a next target around $115 and it tagged it today, so I would be inclined to take some profits on a trading basis. There is another longer-term target around $130.

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Amgen (AMGN:Nasdaq) is another stock I have been highlighting positively and it had a big day. It has a next measured target around $265. It would be best if it would flag up here though, since I can’t chase it.

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I am, however, still waiting (it has been weeks) for Abbott Labs (ABT) - Get Free Report to break out of this extended flag.

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Today’s Indicator

The Volume Indicator is overbought at 55%

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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.

We had a nice trade in Anheuser Busch (BUD) - Get Free Report about a month ago and quite frankly aside from the fact that it has no life in it whatsoever, this is probably the area to start looking at it again.

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I think we have looked at Cisco (CSCO:Nasdaq) a few times in the last month or so and each time I go to this longer-term chart, because if it can ever get up and over all that resistance it will be a nice chart. So as long as it doesn’t crumble under $44 it gets a chance.

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Inseego (INSG:Nasdaq) is a decent chart. Getting up and over $12 would be helpful to give it a run toward those old highs in the $14-$15 area.

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