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Oversold Enough to Rally

Small caps should bounce this week. It's a matter of whether or not they come down once more early in the week.

The Market

Ahh, so small caps finally bounced on Friday. It was more like they stopped going down but you have to start somewhere. If the selling resumes again early in the week, it won’t change my view that we are still oversold enough to rally. In fact, a little downside action early in the week might help some of the sentiment measures which are, in my view, not at an extreme.

But let’s talk about what we are looking at. We’ve got the big Fed meeting late this week where folks believe the Fed will talk about tapering. I am not a Fed watcher. So, I won’t opine on what they will or won’t do, but I do know that they decided late Friday to do it virtually instead of in person at Jackson Hole. Why does that matter? Because we’ll have to watch what the bonds and stocks do on that news. So far the iShares Barclays 20-plus Year Treasury Bond (TLT:Nasdaq) has not made a higher high, despite all the shutdown and slowdown news. My view has been that TLT is now in a sideways pattern and should remain that way for the time being.

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It also matters because for now the number of stocks making new lows peaked last Tuesday at 340 on Nasdaq. The NYSE was 118 on Thursday, so there is no positive divergence there. But any downside early this week that has fewer new lows would be another sign that we’re getting oversold short term.

I would also pay close attention to U.S. Global Jets ETF (JETS) - Get Free Report, an ETF to be long airlines. For now it is holding at $21, which means it has not made a lower low versus July. A break here under $21 is not bullish. Then I’d look for $18-$19 to fill that gap below. If it holds, it would be another sign some of this bad news in the travel names is priced in.

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The banks have not made lower lows, nor has the Transportation Index. Those are two other areas to pay attention to. And of course energy.

Now let’s talk about the flip side, beloved technology. It hasn’t done much wrong, but quite frankly the majority of tech, even the mega cap names, have been churning around for weeks. To me, they have become hidey holes, and I don’t think we can have one of those long lasting - multi week/month - rallies until these stocks get sold, or at least we see some panic in them.

I would note that Barron’s cover this week is, “Big Tech Won’t Be Held Down”. I would remind you that they put Inflation on their cover back in May and commodity stocks topped out two weeks later.

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I am no expert on the SKEW Index. But I can read a chart and the SKEW for the Nasdaq 100 is elevated back to the area it was before it took a spill in February. So the bottom line here is don’t be complacent about those big cap tech names because it seems too many are now.

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In sum, I think the small caps should bounce this week, it’s a matter of whether or not they come down once more early in the week first. My concern is that sentiment will quickly shift to bullishness since it never backed off as much as it should have.

New Ideas

A week ago when JP Morgan (JPM) - Get Free Report was at $160, I said I wanted to buy it at $156. Instead it came down to $153, but it has bounced and filled the gap. I think it should find some footing here to rally again.

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Today’s Indicator

The Nasdaq Hi-Lo Indicator is at .37 which is the lowest since March 2020. At .20 it gets intermediate term oversold. Will it get there?

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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.

Disney (DIS) - Get Free Report has been in a trading range for months now. Since it is at/near the bottom of the range it ought to bounce.

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The iShares MSCI Emerging Markets Index (EEM) - Get Free Report, an ETF to be long emerging markets, has an unfulfilled downside target in the mid $40s. I suspect it will take some time to get down there though since it is now quite oversold.

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Air Products (APD) - Get Free Report should find some support in the $255-$260 area so I would expect a bounce from there.

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That top in LyondellBasell (LYB) - Get Free Report measures down to $85-ish. What makes me hesitant though is that instead of the rally after the break of $100 stopping at $100, it went all the way to $105. So, was the move to $92 a false break or was the move to $105 a move to run the shorts in. If it can rally from the oversold condition this week and get back over $100 with some oomph, I’d have to have another look at it.

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