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Look on the Bright Side

We saw some minor positives in Thursday's decline, so let's dive into them and what they mean.

The Market

Who wants to hear some positives after the last few days? There are a few minor positives. There are not enough to get me thinking we are ready to rally well again, but the same way on up days I like to point out what wasn’t great, let me point out what wasn’t awful on Thursday.

Let’s start with the volume in the Invesco QQQ Trust (QQQ:Nasdaq). It finally turned to the upside. It’s not as high as the other peaks you see on the chart, but usually unless and until you get a spike in volume in the QQQs, it is unlikely that we have had enough selling. A spike in volume means folks are getting more nervous and they are selling.

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Why do we want folks to sell? Because as I have explained for weeks now, when the number of stocks making new highs is faltering as it has done since June 21, it means it is harder and harder to find stocks to go long on. Your percentage of hits for winners goes down. That typically means much of the cash on the sidelines has been put to work already, and that’s why there is very little expansion in new highs.

So if we get folks to sell, then they are raising cash, aren’t they? Then they will have cash to buy when we come down again. If that sounds too simple, then I ask you to look at that chart and explain to me why else is it that volume rises near lows not highs?

Another positive is the put/call ratio was 106%, which is the highest we’ve seen since early June. After being so complacent for weeks, there is now some concern in the market. Remember that negative sentiment and oversold conditions are what set up good rallies.

Also breadth, again, was not that bad. Now it was actually pretty poor in the early going, when the indexes were much higher, but the fact that it didn’t collapse on a second down day is at least worth noting.

The McClellan Summation Index is still heading down. It now needs a net differential of plus 1,900 advancers minus decliners to halt the decline. At plus 2,000 it steps a toe into oversold territory. At plus 4,000 it is considered extremely oversold. The negatives include the fact that there was yet another rise in the number of stocks making new lows. The New York Stock Exchange saw an almost doubling from two days ago. I cannot spin that positively.

On the sentiment front I noted the higher put/call ratio, but you will see down below that the 10-day moving average has hardly budged off the low, which is in keeping with my view that even if we rally tomorrow or the next day we’re simply not done yet.

Also on the sentiment front, the American Association of Individual Investors (AAII) bulls finally jumped in this week so that will have to reverse.

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Notice that the four week moving average of bears is still falling. That needs to rise for us to believe sentiment is negative enough.

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It’s a process, going from overbought and complacent to oversold and fear. We’ve gotten the process started.

New Ideas

We looked at SPDR Gold Trust (GLD) - Get Free Report earlier in the week, and I am sorry to say that it missed ticking my “buy” line by about 50 cents. But it did rally. It has not made a higher high yet. I am torn because the Daily Sentiment Index is 86. It means there is a bit of room to run, but not a lot of runway. Yet the DSI for the dollar was 94 Wednesday, so it is time for the buck to come back. Longer term, the target on GLD is still around $140 or maybe $150. So if it does get to $140 and the DSI gets to 90, I’d look for another pullback.

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Today’s Indicator

The chart for 10-day moving average of the put/call ratio is below.

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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.

I had thought Uber (UBER) - Get Free Report had a chance to rally a month or so ago, and it popped and dropped, so it gave me nothing. Now it has broken down. Rallies back to $43 would be a good place to sell.

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Revolve (RVLV) - Get Free Report is a bit too new to determine if the chart has any validity yet, but I’d say a break of $32-ish and it probably revisits that first trading day’s low near $25.

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Continental Resources (CLR) - Get Free Report looks awful. But every other time it has collapsed to this line it has rallied. If I liked the market more, I’d think it was worth a stab with the risk just a dollar lower. I’ll say this: If it can hold here for a day or so, I’d probably give it a try with a stop of about a buck lower. But know that it looks like it’s just a trade, similar to the United States Natural Gas Fund (UNG) - Get Free Report chart we looked at Monday.

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Invitae (NVTA) - Get Free Report holds well. I stink at these high bases, but I would note there is a target around $29, but another potential around $34. Use that uptrend line as your support/stop level.

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