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I Worry About This Overbought Reading

I have it pegged around Tuesday of the coming week.

The Market

I have complained about the market's breadth over and over again and so did everyone else. So what did the market do? It improved breadth, when using the advance/decline line. Even the number of stocks making new highs improved. The Russell 2000 improved too. Heck it has rallied 5% instead of the 3% rally we've seen in the S&P.

This has helped the McClellan Summation Index improve. The Hi-Lo Indicator has turned up as well. These are all positives in the market.

Yet while the advance/decline line has been positive for six days in a row, net volume -- that's up minus down volume -- has been negative for four of those six days. That is not exactly the kind of better breadth readings you want to see. What you want is more volume on the upside than the downside.

So while I can't scoff at the rally as much as I have, there is still plenty to nitpick. But what we should be concerned about is the upcoming overbought reading. As previously indicated I expect it to arrive just after Thanksgiving. Based on my own Overbought/Oversold Oscillator, I have it pegged around Tuesday of this coming week.

If we use the Nasdaq Momentum Indicator, it arrives on Friday of this week, the day after Thanksgiving. On the charts below, you will see Nasdaq as well as the Momentum Indicator. This is based on price; what I have done is plug in a higher close of 20 points for Nasdaq over the next several trading days. No matter what I plug in, you can see the Momentum Indicator goes down starting Friday. What is even more curious is that it does so from a lower high.

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However, since the Fabulous Five stocks have actually been rather quiet of late, I did the same exercise using the Russell 2000. In other words, I went to where the action has been. Here, too, it gets overbought, but the Momentum Indicator does not roll over the way Nasdaq's does. Rather, it churns for several days (chart not shown).

We have a lot of market moving news during the first week of December, with an OPEC meeting and an ECB meeting. Both are widely expected to be positive (OPEC for Oil and the ECB for stocks). Keep in mind the market rallied on bad news because we were oversold. Perhaps we'll sell off on good news because we are overbought?

Reminder: there will be no Letter this weekend. I will write again Monday evening.

New Ideas

JB Hunt (JBHT) has layers of resistance overhead but each time I put the pencil to the paper I think this stock doesn't want to go down anymore. A push over 78.50- 79 should get it to 81-ish pretty fast and then dips back to 79 would be buyable. I'd be inclined to buy it now in anticipation with a stop under 77.

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Today's Indicator

The ISE Ratio's 21 day moving average continues on its downward path.

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Q&A/Reader's Feedback

I am not a fan of charts like iShares MSCI United Kingdom (EWU), an ETF to be long the U.K. stock market, because of its total indecision, with lower highs and higher lows. Yet I can't help but recall that Europe was supposed to be the outperformer this year and has instead been an under performer. For now it's trapped between $16.75 and $17.50, so I would expect a breakout in either direction, but my sense is that if the dollar can back off, this would break out to the upside.

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For iShares MSCI Germany (EWG), an ETF to be long German stocks, we have a similar picture. The same is true; we're in a trading range of $26 to $28 for the time being. If the dollar can back off, then the upside seems more doable.

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ADT Corp (ADT) has a nice base it's working on. There is resistance at $36, but if this starts to move up the target will be around $38-$40, where we see a gap on the chart. I like this with a stop under $33.50.

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Gol Linhas (GOL) is an awful chart even I don't want to bottom fish in! If it breaks that line then it's another leg lower (although with a sub one dollar price, how much lower is debatable!) Considering most of the airlines look awful, I'd be inclined to stay away from this for the time being.

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