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Pressing Reset

Now that the rally functioned as it should have, following Friday’s action mood appears to have been reset.

Yes, I still think the market should back off. Perhaps this week is the right timing for it, now that the rally has accomplished what it was supposed to have.

On Tuesday night, after three sharp down days, I noted that we should rally for a variety of reasons. One reason was we were oversold and another reason was that the put/call ratio had ramped up to 113% (equity ratio to 70%). The other reason was more of an intangible. It was that after three sharp down days, the mood had turned sour, and we needed a rally that would reset that mood, just like we needed a decline to reset the giddiness we saw just prior to Thanksgiving.

I believe after Friday’s action, the mood has been reset. I don’t think it has been reset as much as it was after three straight down days, but reset it has. The put/call ratio moved down to 88%, which is neutral, but it is the lowest reading since Nov. 18. That should give you an idea of the change in sentiment in three days.

In addition, the Daily Sentiment Indicator, which had gone from 91 for Nasdaq the day before Thanksgiving to 60 by Tuesday is now back at 77. This is not too high, unlike the readings over 90 that we saw, but you can see the mood swings quite clearly in this daily indicator.

Sticking with sentiment, the 30-day moving average for the total put/call ratio has turned up. In the last two years, this has been a reason for the market to back off. There is one possibility though: that period in the spring, when it attempted to go higher in March and instead renewed the decline.

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The equity put/call ratio’s 30-day moving average is now at 58%. It doesn’t get down here very often. It has not turned up yet, but this is showing a high level of complacency as well.

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Friday’s rally saw another day of good breadth, so that makes an entire week where breadth did well relative to the indexes. That is always a plus for me. It took three days of rallying for the McClellan Summation Index to finally stop going down. The caveat is that a down day or two will send it right back down, so for now all we have is that it stopped going down.

But now I want to discuss some ratios. Last Thursday evening we looked at the chart of iShares Russell 2000 Index (IWM) - Get Free Report relative to the SPDR S&P 500 exchange-traded fund trust (SPY) - Get Free Report and while the small caps did outperform on Friday, it was not enough to cross that downtrend line.

Let’s move away from small caps for a minute, since the entire financial world is so focused on them and look at the PowerShares QQQ Trust (QQQ:Nasdaq) names. The QQQs relative to SPY have gotten up to an area that has halted their outperformance each time over the last two years. This is not a market call, so much as a wondering out loud if the QQQs can continue their outperformance much longer. Think Apple (AAPL:Nasdaq) and Microsoft (MSFT:Nasdaq).

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Even IWM relative to the QQQ hasn’t made a lower low in three months.

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Now let’s look at the Energy Select Sector SPDR (XLE) - Get Free Report exchange-traded fund for oil stocks relative to the QQQ. There is not a lot to hang your hat on here, except that for the last month this ratio has not made a lower low. This relationship has been in a very steady downtrend all year – heck, even longer than just this year. It would need to cross over that line to convince me there is more here than a short-term rally, but maybe, once again, it means the QQQ’s outperformance is going to be difficult to continue.

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In any event, there is a lot going on this coming week, not the least of which is the deadline for tariffs on imports from China next weekend, on Dec. 15. There is no telling how that will turn out, but I suspect we will see higher than normal hedging with options as the week wears on, especially since it is year end.

New Ideas

I was asked for a measured target on Las Vegas Sands (LVS) - Get Free Report, which I liked on that pullback near $60 a few weeks ago. It still needs to breakout over that blue line around $65, which I think could be difficult in the near term, but once over that, the first target would be $67-$68, just due to the old high, but over the intermediate term, it would be around $72 and $78.

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The iShares Barclays 20-plus Year Treasury Bond (TLT:Nasdaq) never got down to that $136-$137 level last week, but now there is an uptrend line there and the DSI is back at $32. So, I still think it is buyable should it get down there.

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Today’s Indicator

The new highs increased for both the New York Stock Exchange and Nasdaq, but they have yet to exceed their prior readings.

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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 Shopify (SHOP) - Get Free Report, which I liked about two weeks ago, when it was just shy of $320. It measures up into the $400-$410 area, but the resistance starts at $380, so I would say I think it should flag here and have another push higher.

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Whirlpool (WHR) - Get Free Report is an interesting chart, because that head-and-shoulders top was small; it only measured to $140, which is where it came to earlier this week. But now, bear with me as I describe what would improve this chart. As I have drawn in blue, a pullback would give this stock the possibility of a small head-and-shoulders bottom, wouldn’t it?

Notice, too, the red downtrend line, because it comes in right where resistance – the current neckline – comes in, so a pullback here that holds would sort of give it a running start to get over these two lines (black and red). The key is that it does not break under Tuesday’s low.

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I recommended Brekshire Hathaway (BRK.B:NYSE) a few months ago, which might have been the first time I have ever written the chart up in such a positive light. So, now, I was asked for a measured target. I can come up with a target in the $230-$235 area. It’s hard for me to chase up here near the recent high, but a pullback to test that line near $220 would be a good spot if it can get there.

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Guidewire Software (GWRE) - Get Free Report hit its measured target when it got to the low $120 area recently. Friday’s action was not pretty. Once again, this is a good reminder that when a chart reaches a target more often than not it corrects or goes into an extended sideways period.

There is support around $108 and again around $102. I would be inclined to let this settle out as I suspect the selling is not yet done, and even if it is a rebound, it is likely to run into selling overhead.

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