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Panic’s in the Air. Or Is It?

Let’s look at the anecdotes vs. the indicators.

The Market

It’s difficult to know exactly where to start, so I am going to begin with sentiment. Anecdotally there seemed to be a lot more panic today than Monday. But it’s relative. I suspect it’s because a big down Monday open often gets bought, so folks were not as panicky as when the decline arrives just a few days later.

But let’s talk statistically. I do not have one indicator that says we’ve got panic.

I do, however, have the Investor’s Intelligence bulls now at 51.5%. That’s down 10 full points since the peak in late August. Keep in mind that this reflects market views as of last Friday, when small caps were still doing relatively well. I expect it’s possible to see this in the mid-to-upper 40s next week. In the low 40s, it starts to get interesting. Under 40%, and I will believe it has gone too far.

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One reason I fuss so much over this sentiment indicator, rather than the American Association of Individual Investors (AAII), which will be out Thursday morning, is because this is a scientific poll. The AAII -- which should show bearishness, since it always seems to do so –- is much more like my Twitter poll, which is wholly unscientific. Also, the Investor's Intelligence survey has been around for 50 years and has been a consistently good tell in the markets. Think about how many times I said over 60% bulls is a red flag. That’s what it took.

The put/call ratios have not been high, certainly not high enough for me to think folks are getting panicky enough. We’ve had exactly two readings of 1.0 or more since the decline started in early September. Contrast that with March, when by late February we were already getting readings in the 1.2 and 1.3 range.

The Daily Sentiment Index (DSI), which got over 90 in August for both the S&P and the Nasdaq, are now sitting in the middle of the range at 44 and 49, respectively. Under 20, and I’d think there was concern. Single digits, and I’d consider it panic.

Indicator-wise, breadth was poor again. The number of stocks making new lows started to rise again Tuesday, and continued Wednesday and now count more than the peak reading we saw a few weeks ago for Nasdaq. For the NYSE, 10-day moving average is now closing in on the May peak, yet the S&P is much higher now.

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As we progress in the days and weeks ahead, you can expect I will start discussing some of the intermediate-term indicators, which ought to begin the shift to an oversold condition. The 30-day moving average of the advance/decline line, shown here Monday evenings, will reach an oversold condition sometime between Friday and Wednesday. Down below the Volume Indicator is now at 47%. Readings in the low-40s are oversold.

The Hi-Lo Indicator for Nasdaq is at 60%. A reading under 20% is oversold. So you can see there is still some room for these indicators to get oversold, but they are a far cry from the extreme overbought readings they were at most of the summer. And, we’ll watch sentiment, because eventually that should get extreme to the “too many bears” side, the same way it got too bullish.

This doesn’t preclude rallies happening before we get those intermediate-term indicators lined up. In fact, once again we’re a little short-term oversold, and we might even rally again Thursday. But now we watch for those intermediate-term indicators to get to their oversold readings.

New Ideas

I have had a lot of questions on the SPDR Gold Trust (GLD) - Get Free Report. I have not been bullish GLD in quite some time, although I did like Kinross Gold (KGC) - Get Free Report a few months ago when it was at $8. When I return to the gold trade that would probably be one I’d look at.

For now the DSI is still at 40, and too many are looking to buy the dip. I think if GLD gets down to $170-$172 I’d look for a bounce. If sentiment is bearish when it gets there I’d look for more than a bounce.

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I am still a fan of the dollar. At some point, that trade will get overloaded with bulls, but I don’t see it yet. Invesco DB US Dollar Index Bullish Fund (UUP) - Get Free Report did fill the gap today and did it on massive volume so perhaps we see a pullback but I don’t think the buck is done yet.

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Today’s Indicator

The Volume Indicator is 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 am inclined to think NIO (NIO) - Get Free Report will come down and tag that lower line, which would also be the spike low from early in the month. That’s the area of $15.

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Overstock.com (OSTK:Nasdaq) looks like this could be a flag that if broken could measure all the way near $40-$50. There is support at $60 then at $40-$50. Remember any stock that did not make a higher high and closes in on the recent lows is vulnerable.

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I really thought United Health (UNH) - Get Free Report would have some legs when it broke out (over blue line) in early August but it failed — see the lower high attempt in early September. It seems to me we could be looking at $270-$280 as the next stop.

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