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On the Level

Here's why I'm looking at the indicators and divergences -- and not the levels.

The Market

Remember all those channel lines that have been in place for a few months now?

Well, almost every one of them broke on Friday. I know, most folks who look at charts want trendlines to hold, especially in the index. I am a fan of indexes that break well-watched levels. Breaking a well-watched level can create bearishness and high levels of bearishness are bullish.

So when I get asked what level needs to hold, I usually shrug. What needs to happen is we need bearishness, we need oversold-ness, we need positive divergences. If that means the index is down 8%, so be it. If it means it is down 5% that’s fine, too. So is 10% or 15%. What matters is if the indicators are where they should be/need to be.

Bullishness has been wrung out of this market in the last few weeks. I showed you how the National Association of Active Investment Managers Exposure Index went from 113 to 83 in a week. The AAII bears have gone up and the bulls have come down. Even the put/call ratio zipped right up to .93 on Friday, the highest since early December. The Equity put/call ratio got to .58, which is really not terribly high, but is the highest reading since the post election rally began.

Then there is my Saturday Twitter poll, which I will admit is wholly unscientific, but folks are leaning toward the negative side of the ledger with 42% looking for the next 100 points in the S&P to be up while 58% are looking for down. The spread was wider two weeks ago but it surely shows the shift in sentiment.

None of these readings is extreme, but the shift is on.

Then there is the number of stocks making new lows. Last Wednesday, I noted they had soared. Friday they were back to low levels. In other words, new lows did not increase. That is a minor positive divergence (the 10-day moving average is still rising).

In terms of oversold-ness, I think at some point this week we reach a short-term oversold condition. It’s a bit difficult to pinpoint the exact day, but surely by the end of the week, if not before.

On the intermediate-term front, I don’t have any oversold indicators and, as noted, sentiment is not really that bearish, only a lot less bullish. But I will be on the lookout for an oversold rally this week. Should Monday morning open on the downside, I think we should be looking for an oversold rally from that.

The most oversold indexes right now are the Transports (iShares Transportation Average/ IYT:NYSE) and the small caps (Russell 2000 fund IWM:NYSE). We looked at IYT Thursday evening. Here is IWM.

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I doubt we’re done with the volatility. It seems there will be more aftershocks after last week’s earthquake.

New Ideas

We looked at the silver exchange-traded fund (SLV) - Get Free Report with a positive eye last week and it has had a nice run to resistance. The ETF had massive inflows on Friday. Here’s the tricky part. Should it breakout over 25.50-ish, I expect it to capture a ton of attention. The Daily Sentiment Index (DSI) is now at 83, so a breakout might take it to close to 90 if not over it.

Do not chase a breakout. In fact, I’d probably take a little off the table if it breaks out. It’s still a good chart, so I don’t want to be negative on it but recall that the early January high was accompanied by a DSI of 90.

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Today’s Indicator

The new lows are discussed above.

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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 was asked to follow up on FedEx (FDX) - Get Free Report, where I was so right and then I screwed it all up. We caught the decline and the breakdown and even the re-rally back to the breakdown. I even drew in the exact pattern you see right there on the chart. My mistake? It was when the stock dipped back to $250 a week or so ago, I gave up on the lower low and thought it would rally again. That was just plain dumb on my part.

What now? There is a measured target around $225-$230. I would look for an oversold bounce this week.

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Starbucks (SBUX:Nasdaq) has a measured target off that top around $93-$95 and that gap down there at $90. I think it is a day or so away from getting oversold enough to bounce, but I think a rally back to $100-$102-ish is about all it can do before it retreats again.

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Nasdaq OMX (NDAQ:Nasdaq) met its upside measured target when it tagged that $144 area a few weeks ago. It ought to bounce from that $132-ish area, but I would think it is just an oversold bounce from there. Playable if you’re trading, otherwise it is going to take some time to improve this chart.

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