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Out on a Limb

Now's the tough part: Figuring out when we go back down.

The Market

I have a confession. I find it easier to pick an oversold condition in this type of market than I do to find the next overbought. In other words, it’s a lot harder to figure out when we should get the “back down again” part of the scenario I have been harping about for two weeks now.

There are a few reasons. In this particular case, I based the oversold scenario on my own Oscillator and the Nasdaq Momentum Indicator. My own Oscillator looks like it goes into a chop mode for the next few days and depending on if breadth continues to be good this week (or not) will depend on when we get overbought.

So let’s assume breadth is positive for a few more days. That scenario makes us overbought in about a week. Let’s assume breadth is not positive for the next few days: There is no telling when we will be overbought again. To get oversold or overbought we need the market to have a trend that lasts longer than three days and we have simply not had that in weeks. Every decline gets interrupted by an up day or two and every rally has been interrupted by a few down days.

But I have some good news: The McClellan Summation Index stopped going down. It has been heading down since mid-July, so that is a change. You would need to really squint to see the turn up. It needs another good breadth day for that.

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More good news is that for the first time since July 31, we saw more highs than new lows for Nasdaq. So that’s a change. The 10-day moving average of new lows is coming down (it has been since Thursday).

And the bad news? Remember that high put/call ratio we had for equities last Thursday (98%)? Well it just shrunk to 55% Monday, which is the lowest reading since July 12. The good news is that the 10-day moving average is very much heading down now. The bad news is how fast folks seem to have embraced the rally.

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I think we are more apt to chop over the next few days. Much will be learned if breadth can continue to do well. If it can, then I think the pattern I drew in for iShares Russell 2000 Index (IWM) - Get Free Report in my last letter will work. We’ll get overbought, come back down and form the pattern.

New Ideas

I want to go back to the chart of Packaging Corp of America (PKG) - Get Free Report that we looked at recently because it hardly had any selling in the decline and is now kissing resistance, which if it can break through would be quite good.

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And once again, keep your eyes on Adobe (ADBE:Nasdaq), because it barely rallied Monday. A break of that uptrend line and the prior lows at $280 is bearish.

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Today’s Indicator

The 30-day moving average of the advance/decline line is not yet oversold.

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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.

Scorpio Tankers (STNG) - Get Free Report met its upside target in June and July at $29-$30. It has been correcting since. Right now, I expect $27-$28 to be resistance. I would look for a pattern similar to what I drew in on the iShares Russell 2000 Index chart from my previous letter to flesh it out better.

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I have liked iShares Nasdaq Biotechnology Index (IBB:Nasdaq), an exchange-traded fund for the biotech stocks, since late July, when I thought it was rounding under. It curled under nicely and then wham! The rug got pulled out, and down it went just to prove me wrong. Yet, I still find myself believing the chart is trying to curl under and work its way higher. But now I would say I’m wrong if it cracked seriously under $100. And if it can get up and over $107 I’d raise that level in a hurry.

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I was asked to look at Natural Gas (natty) but I am going to use United States Natural Gas Fund (UNG) - Get Free Report, an exchange-traded fund, to look at the chart. In late July the Daily Sentiment Index (DSI) got down to single digits and it rallied well and came back down but the break of the prior lows was short lived. I think it can rally to $20-$20.50 then I’d have to reassess it. I think it if fills the gap at $20.50 it is more bullish than if it doesn’t.

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