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Market Is Overbought, Not Overdone

Interesting statistics abound.

The Market

This is exactly the way an overbought market should act. It gets tired, it rolls over and corrects. Was it dire? No. The same way the recent oversold condition was not exactly filled with any sort of serious robust moves, the overbought reading doesn't seem to be filled with anything terribly robust yet.

There were some interesting statistics in today's trading, though. Breadth was really quite good despite the 10-point retreat in the S&P. NYSE breadth lost a mere 400 issues. Yet once again when we add volume to the mix, we discover there was a lot more selling than meets the eye as the net volume shows a loss of about 900 million shares.

Lest you think all this selling is bearish, ultimately it is not. In the near term it is, but keep in mind that once the selling is done, the market can rally better as resistance can be cleared more easily (no one owns the stocks anymore).

In addition to the better breadth, the number of stocks making new highs on Nasdaq saw a nice increase. This is underlying improvement, or more to the point, the market is no longer concentrating itself in a handful of names. Then there is sentiment; it is all over the map. Bloggers show the fewest bears since the spring. This is not good since we made highs in the spring. As a contrary indicator, this says too few bears is a market negative.

But the put/call ratios have caught my eye. The put/call ratio for ETFs is the highest it has been since before the late September/early October lows. Typically, this ought to be viewed as a contrary indicator, but when I checked back I discovered five of the last six such readings (over 200%) showed this to be non-contrary: These folks were correct to buy puts.

The one time they were wrong turned out to be Sept. 28, which was the low, but please note on the chart that the week in general was a volatile one, something I can see happening this week. The other times are noted with a red arrow on the chart, so you can see they were correct to load up on puts.

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Keep in mind, when we look at the 30-day moving average of the ETF put/call ratio, we see the indicator looks set to rise, which is bearish. So higher one-day readings should lift this moving average.

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The flip side of all of this is that there were quite a bunch of calls bought on the VIX, enough to take it to 20%. As we discussed last week, lately they too have been correct, not contrarians. So while the market seemed to act overbought today (and not much more than that), I still think we should look for volatility in the first part of December.

New Ideas

If the market were in an oversold condition, I would be quite bullish on the chart of Workday (WDAY) because it looks like it wants to break out over $85. I'd use a very close stop under $82.

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I still think the chart of Colgate (CL) looks like it's rolling over. The next support/target is near $64.

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Today's Indicator

The 30-day moving average of the a/d line is still overbought, or at least not oversold.

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Q&A

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.

NeoPhotonics (NPTN) had a nice breakout this week and actually has a measured target in the $12 to $13 area, although I believe that high near $11 will be a near-term roadblock. That means it should stop there and pull back, perhaps to the recent breakout near $10, then try the upside again.

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I realize I am supposed to like the banks and financials because we're supposed to have a rate hike in December. So if that's the case, why aren't bonds lower (rates higher) and the S&P Regional Banking ETF (KRE) higher? There is an upside target near $50, so as long as this stays over $44 it should get there, but at this moment (i.e., the short term) it does not look promising to me since it can't get over that early November high.

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I liked Nordic American Tankers (NAT) way back in January, but the stock had hit my target quite some time ago and I stopped looking at the chart. I was somewhat surprised to see it hasn't gone anywhere in months and appears to be rolling over. For now, there is solid support at the $14 area, so unless that breaks, this has a chance of being a long -- very long! -- consolidation. I'd lean toward a break of $14, but if I were to short it I'd have to use a stop over $15.50. It might take a few months for it to break, though.

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High on Tech

High on Tech

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