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Is the Clock Ticking on the Rally?

If breadth can improve and turn up the indicators, then the overall health of the market can improve, but there's an argument to be made we’re likely late in the rally or due for a correction.

The Market

Well at least breadth improved. Not enough to make a higher high in the cumulative advance/decline line, or even enough to get the McClellan Summation Index to stop going down, but improve it did. I have discussed the new highs and new lows quite a bit of late. Typically I show you the new lows using a 10-day moving average. For both the New York Stock Exchange and Nasdaq, the new lows have turned up and are moving higher. Some have noted that it’s the time of the year, since we are into tax-loss selling season. I would not dismiss that, but I am not fond of rationalizing an indicator and that is rationalizing.

But let’s take the other side, and look at the 10-day moving average of stocks making new highs. Since for those who want to rationalize the new lows, this is an indicator that should have nothing to do with tax-loss selling.

Nasdaq is in better shape than the NYSE, but Nasdaq’s moving average peaked a week ago. That’s not a strong endorsement for the rally, but I will grant you that we mostly just ground around for a week except for Friday. The reason Nasdaq is in better shape is because it has made a higher high, beyond the prior high from the spring.

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Now take a look at the NYSE highs. Not only did it make a lower high, it peaked and rolled over and is now back to where it was in late October. I don’t know that these are very good timing tools, but I think it sheds light on what’s going on under the surface. And what’s going on under the surface is that the rally has gotten narrower in the month of November.

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Then there is sentiment. Just look at the 10-day moving average of the equity put/call ratio. It is at 56%, which is the lowest reading since mid-June 2018. I know everyone will look at the January 2018 low in the indicator and get scared, but the mid-year 2018 reading gave us a correction, that’s it. Corrections are what the market does when it needs to correct the excess. Either way, I think we can agree that sentiment using this indicator is giddy.

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Then there is the DSI. I said last Thursday that if we could have a strong rally, we could see the DSI for Nasdaq and the S&P 500 at, or over, 90 and maybe even the Volatility Index under 10. Well, the S&P is now at 90. Nasdaq is at 91. The Volatility Index, though, is at 13.

I looked back at prior instances when the DSI got over 90 for the two major indexes, and discovered something interesting: There was rarely just one reading over 90. Usually we backed off from just the over-90 reading, but we rallied again within a short time and had another reading over 90.

Here are some examples. On July 3, we saw the first readings at or over 90. That’s the blue arrow on the chart. Notice how we backed off and came on again — twice? Those subsequent highs had readings over 90 as well.

I’ve used a green arrow in April, since we got our first readings over 90 early in the month. We went sideways and then rallied into the end of the month. The eventual peak readings over 90 occurred on April 23, about a week before the peak in the S&P.

Finally, there is January 2018. The readings over 90 began just after the first trading day of the new year. The market just kept on ramping, with hardly a breather until it peaked late in the month. The DSI topped out a few days prior to the peak reading at 96 for the S&P 500 and 97 for Nasdaq. I’ve used a red arrow there.

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The main difference is that those DSI’s that came early showed up before any of the indicators were rolling over. The best example I can offer is that in all three cases, the 10-day moving average of stocks making new lows was falling, not rising, as it has been doing for well over a week now.

In sum, if the breadth can improve and turn these current indicators from down to up, then the overall health of the market can improve. But when the DSI gets over 90, we are not early in the rally – we are late or due for a correction.

New Ideas

How can the rally improve? Take a chart like JB Hunt (JBHT:Nasdaq), which is a prominent member of the Dow transports. Notice that it bottomed in May and made higher highs in July and August. In late October, it seemed poised to make a run higher as it broke out from a one-year range. It has now given it all back, that late October run. What it ought to do is make a stand in this $113-$115 area and rally again. If it cannot do so, or if it rallies and the rally is crummy and then comes down and breaks support, that’s a sign of underlying weakness not strength.

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Kohls (KSS) - Get Free Report, which I recommended a few weeks ago has had a nice run and I still think it can fill that gap around $60-$62. But be aware it has earnings out on Tuesday, so it’s not a bad idea to take something off the table considering it’s up nearly 20% in a few weeks.

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Today’s Indicator

Here is the chart of the 10 day moving average of new lows for Nasdaq.

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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.

NetApp (NTAP:Nasdaq) is a funky chart with all those gaps. I am inclined to be a seller as it fills that gap near $65.

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Amazon (AMZN:Nasdaq) has fallen out of favor – perhaps the company needs to announce endless buybacks like Apple (AAPL:Nasdaq)? I had thought if it can get over $1,800, it would improve and it failed to do so. A plunge to $1,700 would surely get it oversold enough for a bounce but aside from that, you can see clearly why November has not been kind to this stock. It’s as though a sell button was hit as the month arrived.

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I have liked Square (SQ) - Get Free Report recently, and it has not done me any good, because the stock has gone nowhere. So once again, up and over $66 and I think it makes a lot of progress toward filling that gap overhead – probably with a rally to $70 and a pullback to retest the line followed by another rally.

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