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Now ... It’s Tricky

Let’s recite this vital static: The Overbought/Oversold Oscillator, until now, was dropping negative readings, meaning the market was oversold or at least not yet overbought. We can’t say that anymore.

The Market

Things get a bit trickier from here for a few reasons.

Let’s begin with the Overbought/Oversold Oscillator. It is the 10-day moving average of the net of the advance/decline line. Up until today, it was dropping negative readings, meaning we could continue to say the market was oversold or at least not yet overbought. We can’t say that anymore.

I can say it’s not fully overbought, but the “we’re oversold” part is gone. In the next five trading days, the 10-day moving average will drop three positive readings and two negative ones. That’s what makes it a bit trickier from here.

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In addition, the McClellan Summation Index, which turned terrifically a few days ago, now needs a net differential of negative 4,000 advancers minus decliners to turn back down. On the whole, this is a positive for the market, because it now has an excellent cushion. But in the short term, it makes the market a little bit overbought.

Now let’s move over to sentiment. The American Association of Individual Investors sentiment readings didn’t change much this week. But because I calculate the four-week moving average for bears, you can see it finally moved to more than the December 2018 reading. Next week, the moving average drops a reading of 39% so it might tick higher one more week. But this goes in the plus column.

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The 10-day moving average of the equity put/call ratio has finally peaked and moved down. Again, I view this as a market positive. But I would like you to take a look at the only other times it got this high. It was in March of 2008. For those who don’t remember that period of time, it was what we now commonly refer to as the Bear Stearns low. The market rallied form mid-March until early May, but that was that, we headed down after that.

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The other reading came in late November 2008. We had a 20% rally, also in a handful of days. But notice we didn’t turn and head back down. Instead we milled around in the month of December, with an upward tilt, peaking six weeks later as the calendar turned to 2009.

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I bring this up because both of these rallies lasted approximately five-to-seven weeks and both of them were long enough to get folks comfortable with the market again. Both of them let the indicators run through their cycles. And then we headed down again. I would not be surprised to see something similar this time. By that I mean we don’t get the retest for several weeks.

So for now, I think we’re a little overbought, we’ve come a long way, so a down day would not surprise me, but I don’t get the sense we’re ready to turn back down with any violence yet. More likely dips will get bought.

New Ideas

Amazon (AMZN:Nasdaq) had a nice run last week and has been consolidating ever since. If it can get going again It should be able to get to $2,000 with an outside possibility at filling the gap at $2,100.

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I think the exchange-traded fund for utilities, XLU (XLU) - Get Free Report has the potential to trade as I have drawn in. My levels might be suspect but I think it fills that gap at $60.

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Today’s Indicator

The 10-day moving average of the put/call ratio is discussed above.

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.

It’s a tough call on where some of these stocks will run out of steam, because they literally collapsed without a break. Boeing (BA) - Get Free Report starts resistance around $210, where that downtrend line comes in. The stock has doubled off the low, so if it were up to me, I would probably sell half because it was a good trade. Alternatively, a dip back into the $125-$150 area, especially if it filled that $125 gap would be a decent place to try it from the long side again.

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Syneos Health (SYNH:Nasdaq) has rallied right to resistance. It might go again if it can manage to go sideways for a few days and make this look like a flag. Either way, if it was well bought, I would err on selling half here. A pullback toward that line might — might — have me interested on the long side.

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If General Motors (GM) - Get Free Report can flag here, then it should make a try for resistance in that $26 area where there is a small gap to fill. Do you see the way it flagged late last week? That’s what I would look for.

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