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I See This Going Two Ways

I've got some short-term positives to report -- and here's how I see the market playing out in the week ahead.

The Market

I am going to offer some short-term positives. What I can’t offer is intermediate-term positives. Not yet.

Here are the short-term positives. Short-term we’re oversold. We’ve been oversold for several days now, so, that is no change. Friday’s decline saw the number of stocks making new lows on both the New York Stock Exchange and Nasdaq contract for the first time in two weeks. That’s a positive divergence.

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The equity put/call ratio zoomed up to .77. This is the first time we’ve seen it this high since June. This is good news, since you can see readings in this neighborhood have produced rallies, even short-term ones, in the past.

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I can even point to the Dow bouncing off its 200-day moving average on Friday. I can note that despite all the selling the Invesco QQQs (QQQ:Nasdaq) did not break the short-term uptrend line dating back to late July.

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All of the above says we should get some sort of short-term rally this week. Here’s what I see in the intermediate-term indicators: None are even as oversold as they were in September at that low. The 30-day moving average of the advance/decline line is not oversold; it’s neutral. The Volume Indicator (shown here Wednesday evenings) is at 49%, which is the middle of nowhere. The Hi-Lo Indicator for Nasdaq is at 48%. It was a smidge higher in September. An oversold reading for this indicator is under 20%. The chart is shown below (and discussed in detail a bit more).

The 10-day moving average of stocks making new lows is still heading up. Friday’s contraction, should it continue, should start to show up in about a week. In other words, the 10-day moving average should peak by the end of the week, if the contraction in new lows continues. Then there is sentiment, which I have reviewed incessantly this past week. The Investors Intelligence readings show continued complacency, as do the National Association of Active Investment Manager and American Association of Individual Investors readings. Even the Consensus Bulls have barely budged. I do expect this coming week’s readings to have moved toward more fear, though. It is my contention that folks rarely move from bull to bear (or bear to bull) without first fence-sitting. So, it takes time for the intermediate-term sentiment indicators to move.

The 10-day moving averages of the various put/call ratios have moved up, but do not show any real fear. For example, the total put/call ratio’s 10-day moving average is .91, which is the same place it was in late June and mid-September. I consider this "on its way."

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The Daily Sentiment Index (DSI), which is short term in nature, is currently at 23. A reading in the single digits would scream "buy." It is the lowest reading since April, so I consider this a positive. A single-digit reading would represent true fear/panic, which would be bullish.

Then there is my Saturday Twitter poll, where I inquire what the next 100 points in the S&P would be.

Recall, a week ago, over 56% were looking for more upside. This week’s poll is more even at 49% upside and 51% downside. It would be quite bullish if it were more lopsided to the downside, but I take this "can’t decide" as positive sign for the market, because it shows a change in sentiment -- fence-sitting.

I can envision two scenarios for the week ahead. One is we get the short-term rally and, because the intermediate-term indicators are still not in oversold or "too bearish" territory, the rally is short term in nature -- about one or two weeks. The other is we decline for another week. That doesn’t mean we have to plunge every day, but the basic trend would be to the downside. For example, it would look like up Monday but then down again midweek. And that sort of action gets sentiment quite bearish and gives the intermediate-term indicators a chance to get to a good oversold condition or at least closer to one.

The first scenario leads to a trading opportunity, while the second scenario leads to a longer lasting rally, because when the intermediate-term is oversold and sentiment is quite bearish, the rallies tend to last weeks or months.

New Ideas

I was asked if there is a bank I like. JP Morgan (JPM) - Get Free Report always seems to be my go-to bank but PNC (PNC) - Get Free Report is another decent one with a pretty good yield. If it can ever get up and over $115, it would be terrific, but at least in the short term it should rally there.

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As a follow-up to the person who asked about Verizon (VZ) - Get Free Report a few weeks ago, it tagged $56 this week and bounced. That was the neighborhood I thought it should bounce from and even if it comes back down there, I think it finds support at $55-$56. I can imagine it shaping up in the coming weeks.

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Today’s Indicator

The Hi-Lo Indicator is fractionally lower than it was in September -- while Nasdaq is higher -- so it’s a bit of a negative divergence right now. But I care more about the level or direction. If this can plunge under 20% in the next few weeks, then I’d be firmly in the year-end rally camp.

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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.

Amazon (AMZN:Nasdaq) doesn’t have a good chart, but if it comes down to $2,900 I would have to look for a bounce. Those two lines intersect near there and that would make for a decent bounce area.

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PayPal (PYPL:Nasdaq) gave us a nice trade a few weeks ago but like all the high fliers it has since come down. If the stock got down to the $172-$175 area I’d look for a bounce.

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I would look for XBI to bounce from somewhere between $110 to $112, just because it would be oversold down there. It would need to put in more work for me to like it for more than a bounce, though.

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