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Is This Key Indicator Confirming the Rally?

The McClellan Summation Index has turned up, but considering the run breadth has had, shouldn’t it be better than this? Perhaps, but...

The Market

When the market is at an extreme, we can typically see it in the indicators.

For example, when sentiment is too giddy, we see the Investor’s Intelligence bulls at least over 55% and often close to, or more likely over, 60%. We see the put/call ratios low and the10-day moving averages of these options ratios low, because a one-day reading might not be a big deal, but a moving average shows persistence.

Another example is an overbought or an oversold situation. For the last eight trading days, breadth has been positive every day. Quite frankly, only two of those days are big breadth days. Three of those days could easily have been negative if a handful of stocks had opted to close down a penny instead of up a penny.

What is rare to see is a market that has rallied as much as this one has and the Overbought/Oversold Oscillator, which is based on breadth still so low. And yet, by this midweek, it will be overbought. We had a similar situation in late April and early May. And again in early July, as the red arrows on the chart show.

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In both of those cases, breadth was still relatively strong, as it is now. In late April it had begun to do a lot more chopping, about which is similar to late July. So there were minor divergences with breadth.

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Here’s where it gets interesting. The McClellan Summation Index had turned downward by late April and was not confirming breadth. In July it hung in there better, but still the confirmation was not there.

The question now is: Is it confirming the rally or not? It has turned up, but considering the run breadth has had, shouldn’t it be better than this? Perhaps. I can tell you this: There isn’t a big cushion should breadth turn sour for a few days and if it turns the Summation Index back down, it will have me concerned, because it will be doing so from a lower high.

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So none of these indicators is at an extreme. There is one that was unusual on Friday. The put/call ratio chimed in at 110%. That’s high. But if we break it down, we see that the put/call ratio for the Volatility Index was 198%. That’s extreme. We did see a similar reading on Nov. 19. The next two trading days saw the market pullback and the VIX go from 12 to 14.

We also saw the second straight day with the put/call ratio for exchange-traded funds under 100%. So we have enough to say no one should be surprised by a pullback later this week. The key for me, as always, is how the indicators handle it.

New Ideas

The airlines have been so bad for so long. Even when they rally, they go nowhere. Longtime readers know that my go-to airline has been United Airlines (UAL) - Get Free Report, but lately I find myself wondering about the Delta Air Lines (DAL) - Get Free Report chart. Maybe no one wants to get involved before year-end, but if DAL starts to rally, I think it can get to $60 pretty quickly if there is any interest.

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Today’s Indicator

The 10-day moving average of stocks making new lows has turned up for Nasdaq. That’s concerning.

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Q&A/Reader’s FeedbackHelene 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.

About a month ago I warmed up to Twitter (TWTR) - Get Free Report for a trade. I suppose a rally from $29 to $31 is OK, but quite frankly it was disappointing in that I thought it could get to $32. I still think it can, but I do not want to see it trade back under this line.

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Disney (DIS) - Get Free Report hit its upside target when it got to $150 a few weeks ago. It has now formed a tiny head-and-shoulders top. Quite frankly, I think it would be terrific if DIS broke that $144 area and had a good shakeout since it seems everyone is recommending it. If it got back to $134-$136, I’d get interested again.

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Roku (ROKU:Nasdaq) is sitting right at a support line now, so it’s probably getting a little bit oversold. If you want to speculate on it, then your stop is under that $130 area. I just think there are better charts to speculate in right now. This one looks vulnerable to me.

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