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Overbought to Chop

Here's why I still expect a pullback later this month -- and more chop to come next week.

The Market

Here we are, finally we got that late in the week rally that takes us into the overbought reading. So why did I say I think we can chop for the next week?

Because the intermediate-term is not yet overbought. The 30-day moving average of the advance/decline line is still not overbought. My estimate on that becoming overbought is mid-month. This is why I said I think we probably get the next pullback in the latter part of the month.

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Also, keep in mind that Nasdaq’s Momentum Indicator gets overbought on Tuesday, so we can see another dip in the next day or so and then one more try upward there. Nasdaq has been where the action is (thus my affinity for the Invesco QQQ fund (QQQ:Nasdaq) in the last week or so) and for now I don’t expect that to change.

On the sentiment front, the American Association of Individual Investor Bulls are now the most bullish they have been since January 2018. As a reminder, that peak reading just under 60% came early in the month, but the market rolled over in the end of the month when the volatility exchange-traded fund products imploded and the market had a massive -- but very fast -- downward whoosh into early February.

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The National Association of Active Investment Managers Exposure Index should come as no surprise to anyone, as it jumped from 52 to 90. 90 is the highest exposure since mid- February, when they were at 108. If we don’t get much faltering in Nasdaq by Wednesday of next week, I can see this getting even higher, back into the upper 90s or even 100s. I can make this assumption, because all around me folks who scoffed at big-cap tech a week or two weeks ago, all of a sudden love it.

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As for today’s statistics, it won’t surprise you how lackluster they were. But they weren’t nearly as lackluster as Monday’s big up day, so that’s a plus. Everyone seems to be complaining about the light volume. Light volume does not bother me, it has been the hallmark of the market for decades: Up on light volume, down on heavy volume. What bothers me is a day when all the indexes are higher by a decent amount and 50% of the volume is on the upside on the New York Stock Exchange. Nasdaq was a bit better at 70%, but neither one is impressive.

New Ideas

I know big-cap tech has all the love and some of the names we’ve looked at with a positive eye recently have had some decent moves, but I want to revisit my old friend FedEx (FDX) - Get Free Report, because it’s had a nice pullback this week and bounced off the line, so if it breaks the line, I know I’m wrong to buy more.

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Today’s Indicator

The 10-day moving average of the put/call ratio is heading down (bullish). I expect it will bottom out next week and maybe even head up.

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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 have been a fan of iShares 20 Plus Year Treasury Bond ETF (TLT:Nasdaq) since mid-March, when the DSI got to single digits. It is now stuck at $138. I do think it can manage to get through it in the next few weeks. But overall, in general I suspect TLT will now go into a wide trading range, say between the low $140s ($140-$142) and $134.

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Let's look at two other ETFs. The iShares China Large-Cap ETF (FXI) - Get Free Report is not a great chart, but it also hasn’t broken. I suppose the risk/reward is pretty good here since if it trades under $45, you know you are very wrong (because then it completes a head-and- shoulders top at the same time it breaks the uptrend line). I just think the upside could be a slog, since it just hasn’t done enough work down here that we can say it has eaten through the resistance enough to rally.

If you compare it to iShares MSCI Emerging Markets ETF (EEM) - Get Free Report you can see it’s much clearer what EEM has to do to get going again: cross over $55. It has already tested $55 once, so it has been eating its way through there. The equivalent for FXI is $49.50-$50 on the chart.

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The Invesco Solar ETF (TAN) - Get Free Report, crossed the line I drew in, but then it just died. It should bounce again off this $85-ish level, but if it doesn’t, I will be wrong on how much I thought it could rally once it crossed the line

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