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March Comes in Like a Lion...

We started the month with an oversold rally, but do not get comfortable with this market: Volatility is likely here for a while.

The Market

That was quite an oversold rally. It seems folks want reasons why we rallied so hard. I say stop searching for reasons – sometimes the news can only fill your head with noise. Focus on the statistics. We were oversold. That is enough if you ask me.

It was also the first day of a new month, which is often an up day. But let’s talk about the statistics.

Breadth was good. It wasn’t great. For example, the huge down days last week saw net breadth negative by around 2,400 issues on those days and Monday was positive 1,940. So for a day the S&P was up 136 points, it would have been better to see net breadth at positive 2,400 than 1,900.

Then there was volume. Last week had three days where 90% of the volume was on the downside. Monday’s upside volume was 78%. To put that in perspective, the day after the 2018 low, up volume was 96%. Again, Monday was not great.

But folks are still skeptical since the put/call ratio ended the day at 129%, which for a day that saw the S&P 500 rally over 4% is high. It has served to take that 10-day moving average up even more, taking it back to levels it saw at the May low, August and October lows. It is not quite at the reading it was at in December 2018. My math says this indicator should peak near the end of the week.

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I fully expect to see more volatility in the weeks ahead. I was looking at the market from the 2010 time frame. The reason it came to mind was that just prior to the February decline there were some of the put/call ratio moving average lines that hadn’t been this low since just prior to the Flash Crash of 2010.

I am not a fan of analogs so this is more of a guide than an analog. But back then we’d gone from a higher high in the S&P at 1220 to a total smackdown of 16%, from high to low, in less than two weeks. Sound familiar? This time was about 13% in a week.

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Here’s the current chart of the S&P.

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Do you see the rebound and subsequent decline? More importantly, do you see the process of bottoming that took place over the course of months? Look at the surge in stocks making new lows back in 2010. Sure, 220 is not the same as the 960 we had now, but a surge is a surge. Now notice how many retests there were over the ensuing months, with the new lows never surpassing the prior peak reading.

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Here’s the current chart of new lows.

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Finally look at the surge in the put/call ratio’s 10-day moving average from 2010. It got to 115%. But look further: The subsequent readings were much more subdued.

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The bottom line here is that we’re still oversold. I do not expect to see us rally every day. In fact I would be shocked if we do. If we head back down in the next few days I would expect us to rally again after that because of the oversold condition.

Keep in mind retests are very common. A successful retest is where we come down to or under the prior low – in this case 2855 for the S&P – and there are fewer stocks making new lows. Typically that takes place weeks later, well after the initial oversold rally.

Do not get comfortable with this market. Volatility is likely here for a while.

New Ideas

Let’s talk about the chart of Verizon (VZ) - Get Free Report, because that top it broke down from measured to $53-$54, which it tagged on Friday. Then the gap up Monday left Friday’s action as an island. I think there is so much resistance overhead it will be hard to overcome, but if VZ can eat through that resistance without filling Monday’s gap that is eventually bullish.

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Today’s Indicator

The 30-day moving average of the advance/decline line is oversold enough to bounce, but not yet at a good oversold. That likely comes about a month from now.

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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.

There are no names to review, but I always welcome your requests. And I understand in this current environment it is difficult to focus on individual names.

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