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Nasdaq’s Make or Break Test

This week offers a big test for tech stocks: Do they hold the Nasdaq channel or … not? Also, let's check on Facebook, Amazon, Nvidia and more.

The Market

Let’s do a short review of the last month or so in the market.

In mid-December, we saw stocks have a short correction heading into the week before Christmas. We got oversold that week and rallied for two weeks. Oh sure, we had a few down days in that time frame, but the last week of the year and the first week of the new year saw a nice oversold rally.

We entered last week with the market overbought. I noted I expected to see a proper correction in January. As of a week ago, we had seen sentiment too bullish. We had an overbought market. And, while breadth has been good, it had lost most of its upside momentum, as witnessed by the 10% rally in the Russell 2000 and the flat McClellan Summation Index.

The number of stocks making new highs increased, but upon closer inspection we discovered that about 30% of those new highs were akin to “double counting.” Why? That’s because each special purpose acquisition company – and there are hundreds of them – has warrants or units or Class As or Bs, or a combination of all. So, if one makes a new high, then they all do, thus it’s like if Apple (AAPL:Nasdaq) had three different versions of itself counted in breadth and new highs. I am not a fan of rationalizing an indicator, but in this case I feel it is warranted.

Yet, we still do not see an increase in stocks making new lows. Let me note that the majority of stocks made new lows in March last year, yet we had no problem seeing an increase last summer — not an increase over March, but a rise to more than 100 on a regular basis. We saw something similar in the fall. But then energy and financials, the two groups that were milling around at the lows, rallied hard. That is why we have so few new lows now. So forget the absolute number, no matter how you look at it, even the 10-day moving average is not rising.

In the last two or three months, most of the major indexes have developed channels and with the exception of two days when the Russell 2000 fund (IWM) - Get Free Report fell out to the downside, most have kept within those bounds with an upward slant. They remain that way. Nasdaq (and the Invesco fund QQQ:Nasdaq) are the only charts I see where they reside at the lower end of the channel right now. That means this week offers up a big test for tech stocks: Do they hold the channel or break it?

Remember breaking the channel is not the end of the world (see the IWM that broke it a few weeks ago), but it changes the pattern and changes in pattern are what the market is about. That’s why we pay attention. It’s often an early warning for a correction.

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Friday’s action has still not changed any of the indicators. We are still overbought, although a bit less than we were a week ago. The Summation Index is still flat to down (and requires a net differential of positive 800 advancers minus decliners to stop going down). Sentiment is still too enthusiastic. And, we remain in an either/or market. If the QQQ stocks rally, then it is likely the rest of the market weakens and vice-versa.

Two other reasons for a correction are the dollar has started to rally and so have bonds. Both have been in declines since November, just as stocks began their romp to the upside.

There is one oddity in all of this. Or perhaps not so odd at all. My weekly Twitter poll – which asks whether folks think the next 100 points in the S&P will go up or down – was the widest margin to the downside at 20 points since late June.

Prior to that, the spread was this wide (to the downside) in mid-May. The chart of the S&P below has arrows where the downs swamped the ups by 20 points or more.

I am still in the correction camp, but if that lower line on the QQQs doesn’t break, that’s probably where I’d look for a rally to start.

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New Ideas

I would remind you that I still like the Utes – utilities. Southern (SO) - Get Free Report is always my favorite, but they should all move in concert.

Elsewhere, we finally got the move in Bristol-Myers Squibb (BMY) - Get Free Report last week that I have looked for but Merck (MRK) - Get Free Report is still languishing. I still think this is a base, and I look forward to the day it moves up and over resistance around $86.

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Today’s Indicator

The 10-day moving average of new lows remains low.

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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.

Verizon (VZ) - Get Free Report has come back to support and should be OK down here. There is simply layers of resistance overhead, so it’s hard to point to any levels that clear it right now.

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Limelight Networks (LLNW:Nasdaq needs more work before I can like it. The best thing I can say is there is support around $3.50 the prior low. It just looks uninteresting to me. If you want to own it the stop is very clear, around $3.90.

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Alpha Pro Tech (APT:Amex) is trapped. I don’t think it wants to break to the downside, but does it want to rally over the upper line? Resistance looks like $14-$15 to me.

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CarParts.com (PRTS:Nasdaq) has the look of a top in the making. But in this market I’ll call it a trading range. And it is a wide one, call it $10-$16. If it can get up and over $15, it could make the chart more appealing, but otherwise, I see a wide range.

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The next three charts are definitely related to the QQQs, so you can see how so much is hanging by the proverbial thread, better known as uptrend lines.

Add Nvidia (NVDA:Nasdaq) to the list of big-cap tech stocks that are sitting at important levels. A break of $500 would measure to $400 over the course of a few months. In the near term, it would probably find some support around $475. If it breaks $500 like it means it, then I would expect it to map out as I have drawn in blue.

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We looked at Facebook FB within the last week or so and I explained. I see it as one of two scenarios: It holds over the gap or fills the gap and, either way, it is getting oversold. What changes the chart from a giant sideways chart to ugly is if it gaps down under that $230 area leaving all of this overhead like an island.

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We looked at Amazon (AMZN:Nasdaq) about a week ago and I drew in the same lines noting that $3,100 is an important level and a break under there would likely mean a trip to $3,000 or even $2,900. And, yes, you need to use a big "ish" on a $3,000 dollar stock. I would typically use the judgment that if I need to squint to see the break it’s not much. If I don’t need to squint then it’s a break.

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