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Pricing in Panic

Instead of thinking of Euphoria and Panic as emotions, think of them as the point where maybe, just maybe, the emotions are finally priced in.

The Market

For weeks now I have discussed the Citi/Panic Euphoria Model at the beginning of each week. We had to wait until mid-January, almost late January, before it pushed its way into Euphoria. It then backed off and went deeper into Euphoria in early February.

I have noted that this tells us how much time it would take for this particular intermediate-term indicator to work its way back to Panic. It is still not there, but it is much closer than it has been.

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Instead of thinking of Euphoria and Panic as emotions, because we all know there are signs of panic around us, think of them as the point where maybe, just maybe, the emotions are finally priced in. Also do your best not to think of this as the perfect timing tool. Notice it dipped into Panic in early September but the S&P was already off the low from early August. The indicator hovered at the Panic line until mid October.

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Now look at the S&P. It rallied, came back down — to a higher low — but did not lift off until October. My point is this is a guide, it is not meant to line up perfectly. I suspect in the next few weeks we will see this dip into Panic territory.

But there is a process that must take place first. That’s why I keep showing you the chart of 2010. I could show you 1990. I could show you 2002 to 2003. I could even show you 2008 to 2009. The process that must take place is that we first need to get a rally. We have not been able to even get two green days in a row yet.

Once we get the initial rally there are generally months of testing and retesting, often with lower lows. But each of those subsequent lower lows in the market should start to see the indicators with higher lows, showing us that each time the selling becomes less intense. Showing us that the selling is drying up. Showing us that there is some buying taking place. It is a process. And it typically lasts months from the time we first get that initial rally. We have not even gotten that initial rally yet.

Can we finally get it? There are some seeds in place.

There were far fewer new lows on Friday. In fact, there were the fewest stocks making new lows since early March. It was enough to get the 10-day moving average of new lows to roll over.

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Breadth was surprisingly strong on Friday. With the S&P down 4%, net breadth on the New York Stock Exchange was a mere negative 385. Heck, we’ve had worse breadth on days the S&P rallied 1%. At this point, the McClellan Summation Index is still heading down, as it has been since mid-January. I know it’s been a while since I reminded you, but the direction of this indicator tells us what the majority of stocks are doing.

But it now requires a net differential of positive 2,300 advancers minus decliners on the NYSE to stop the decline. This is an interesting number, because a few weeks ago it needed positive 7,000. But more so, because a decent up day where breadth is good could net us positive 2,000, which would essentially put the indicator in a position to halt the decline with back to back up days.

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I have noted for a while that I expected many of my intermediate-term indicators would not get oversold until April. That is still the case for some, but the Volume Indicator, which has been stubbornly over 40% finally went under 40% late last week, taking it down to 38%. It was 39% in October 2008. Notice that there were still months ahead of testing and retesting, though, with the indicator making higher lows.

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Not shown on the chart is the 2000-2003 bear market. Post 9/11, this indicator got to 37%. It took 18 months for the market to bottom, but we did have a multi-week rally off that reading. In July 2002, it got down to 36%. We had a multi-week rally, but the market did not bottom until March 2003.

I would add on the sentiment front the DSI for the S&P and Nasdaq are both back to 5. The Market Vane bulls are at 29 and the Consensus Bulls are at 31. They were at 69 in early February.

The biggest issue remains credit, because the selling there shows no sign of slowing.

The bottom line is there are plenty of signs we should rally, but we haven’t been able to do so yet. It’s also possible that Friday’s better internal readings for breadth and new lows had to do with the rebalancing of the Russell 2000, but I hate to rationalize an indicator. Even after we rally, however, it will be months of ups and downs and likely lower lows before this bear market will end.

New Ideas

One reason this market is so treacherous, is that while some stocks hold for days, appearing to finally have found some solid footing, they have often just been way stations before heading down again. Look at Apple (AAPL:Nasdaq). It held for almost a week in the $240 area only to give way on Friday. It has some support down at $220, but what solace is that?

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Even something relatively safe like Southern Co (SO) - Get Free Report, a utility, had a terrific 15% one-day rally last week, after I had it here, and then look: Friday the bottom dropped out again. My guess is it has another rally attempt off this $45 area. But this is why I have said we should treat everything as a day trade now and be quick to get out if it is not working. That or sit on the sidelines and watch.

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Today’s Indicator

The new lows are discussed above.

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 had to use a three-year chart on Ares Capital (ARCC:Nasdaq) and still can’t find a support level. The best we can say is it is oversold down here, but a rally to $12-$13 is where resistance is, so I would expect the first time up there that’s where it stops.

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Texas Instruments (TXN) - Get Free Report is an interesting chart, because it’s one of the ones that has been holding in this area for more than a week. There is one measured target that comes in around $90, so perhaps that’s why it is hovering around here. I am not sure I trust it, but if it can get over $105, then I think it can trade into that $110-$112 area. If it gives way, $90 is very doable and maybe even $85.

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As a follow up on silver’s exchange-traded fund SLV (SLV) - Get Free Report, I would note that while it doesn’t trade well (recall the DSI got to single digits last Monday at $8 and it is now $20, it did have its first back-to-back up days since early March. There is a long way to go if this is to bottom, but stringing together consecutive up days is where it begins.

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