Skip to main content

Ready for a Retest

Let's take another lesson from 2010 -- see how long it took to repair the charts after they tumbled so quickly back then?

The Market

I think market players currently fall into one of two categories: Those who believe Thursday was a low and we should rally and come back and retest since this will not be a “V” bottom (that’s my “double-tap” scenario) or those who believe there is still more to come on the downside.

In other words, there seems to be very few who are in the “V” bottom category, if there are any at all. Oh, sure, there may be a few stragglers who are in a different camp, but the majority are in one of the two camps.

I am in the “retest category," because, well, I always am. I always look for a “W” pattern. I always look for that “double tap.” But the first thing that needs to occur is that the market needs to have a rally that lasts longer than a day. In fact, it needs to last longer than two days. And we haven’t seen that yet.

Two weeks ago, we had two huge up days. We also had three huge down days and in the end the indexes closed up week-over-week. Last week we had two huge up days and three huge down days and the indexes closed down week-over-week.

We still have a market that is short-term oversold. In fact, Thursday’s decline did not take my own Overbought/Oversold Oscillator to a lower low, thus creating a very minor positive divergence.

Image placeholder title

Thursday’s decline did show a massive expansion in stocks making new lows, so it is once again possible that we have a peak reading to match against. But as I have noted time and again, these sorts of peak readings get tested, and usually do so over weeks or months, not days. I would say December 2018 was an exception and in that case we had been declining for three months, not three weeks, so the indicators were in a different place than they are now. All the intermediate-term indicators were oversold and all the sentiment indicators showed universal extreme bearishness which is not the case today.

I also have many indicators that are as extreme as they were back in the 2008 decline. So, I want to remind you that so many of these indicators saw the peak downside reading in early October 2008, but the market did not bottom until March 2009. Once there has been so much damage done to the charts it takes a long time to repair them. That’s one reason I keep showing you the chart of 2010, because it took so long to repair charts after they tumbled 20% in such a short time.

Image placeholder title

Some positives from last week’s trading include the following: The Hi-Lo Indicator is at single digits (and therefore oversold) for both the New York Stock Exchange and Nasdaq. They usually require a rally and back down to get a set up for an intermediate-term rally.

The Volume Indicator is at 41%. Quite frankly, I am surprised it is not lower. I think it may very well get to the upper 30s before this is done, but it is in oversold territory. This too usually retests.

The 10-day moving average of the various equity put/call ratios are getting quite high; the equity put/call ratio has been over 100% for three straight days, which is unusual.

Image placeholder title

The Market Vane Bulls are now at 33%. The problem I have touting this, though, is that they barely got bullish in the fourth and first quarter rally and they were at 33% in July and October 2008, neither of which was more than a short-term low.

Image placeholder title

The best news I can offer on the sentiment front is that my mother, who has refrained from even mentioning the market to me, finally asked about it on Thursday night. I know people talk about their parents calling about the market, but my mother, well let’s say her timing tends to be uncanny in that respect.

The Citi Panic/Euphoria Model remains a source of consternation among folks with many saying it is “broken.” It has fallen quite a bit this week, but it is not yet in Panic territory. Once again, I would remind you that the market felt quite euphoric in December and this indicator did not cross over into Euphoria until late January and early February. Had you waited, its timing would have been awesome (No it is not always so perfect). I suspect if we get a double tap in the indicators, we would see this in Panic on that second trip down.

Image placeholder title

The S&P 500 (and most other indexes) finished the day Friday by closing the gap down from Thursday, so I would not be surprised to see some give back on Monday from Friday’s late day ramp. Should that happen I would expect another rally again later in the week. It’s been the pattern. While I can see volatility coming down some I do not expect the volatility to disappear.

New Ideas

We have talked a lot about the bonds lately, so I wanted to share a chart of the Sentiment Cycle matched up with the yield on the 10-Year Note with you since I think it lines up quite well.

Point “A” is returning confidence. “B” is buy the dip. “C” is enthusiasm. “D” is Disbelief. “E” might be Panic and “F” Discouragement. If I am correct, the process of for bond yields bottoming will occur over months, not in a day, not even a few weeks. Notice there was even a lower low after Discouragement’s initial rally.

Image placeholder title
Image placeholder title

I showed this chart of iShares Barclays 20-plus Year Treasury Bond (TLT:Nasdaq) last week with the same line, noting I expect it to bounce off that line, or at least not break it the first time down. That is still my view. If there is a rally that falls shy of 163 then I would look for TLT to break on the next trip down.

Image placeholder title

This brings me to the chart of the Bank Index, which was the only chart that regained much more than it lost on Thursday during Friday’s rally. I will therefore be watching this for signs it may bottom first.

Image placeholder title

Today’s Indicator

The Hi-Lo Indicator chart is below:

Image placeholder title

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.

Exxon (XOM) - Get Free Report did not enjoy a terrific bounce on Friday, despite so many small oil stocks doing so. There are so many gaps on this chart that I would begin by noting the one around $42 and then the one near $47. If they should get filled I’d expect the stock to retreat after the fill. There is very little except the fact that it is oversold to make a stand on.

Image placeholder title

Good news for T-Mobile (TMUS:Nasdaq) is that it bounced off a support line last week. The bad news is that if it can get to $90, it fills a gap that I would expect to then see the stock fall back from. Just look how long it traded between $75 and $85 before it had a rally out of that pattern, it would now need to do some sideways action, before I saw anything more than a trade here.

Image placeholder title

I had noted a week or so ago that if GLD (GLD) - Get Free Report broke that $150 area (black uptrend line) I’d be gone from it. It did so on Friday. It does have support as it heads into the $138-$140 area and there is a small measured target there, so I’d like to see it hold there and make a stand, but it will need to spend time going sideways and making sure it can hold before I like it again.

Image placeholder title

The gold vs. silver exchange-traded fund ratios – GLD/SLV (SLV) - Get Free Report – is something to behold, though. It literally went parabolic late last week. The good news: As we learned from Tesla (TSLA:Nasdaq) and TLT (TLT:Nasdaq) lately, parabolic moves tend to be short lived and it closed well off the high. The current Daily Sentiment Indicator (DSI) for Silver is 17, so another day or two and Silver will be overdone—should the rout continue. Then it will be a matter of getting the ratio back under that line around 10.

Notice the drop down from the ratio channel in early September as it came back into the channel but took about a month to finally leave it behind.

Image placeholder title
Dow is the Most Vulnerable to Profit Taking

Dow is the Most Vulnerable to Profit Taking

Despite the newfound focus on the Dow Jones Industrial Average last week, it turns out we may be seeing the last gasp of outperformance here.

How Hungry Is This Market?

How Hungry Is This Market?

Here's what I'd like to see happen with this rally -- I'd like it to show some FAANGs. Here's why -- and a look at Microsoft's chart, news highs and more.

Sloppy With a Chance of Rallying

Sloppy With a Chance of Rallying

Here's why I see another rally before the weekend, even amid the messiness, and a bump for Amazon.

Sloppy With a Chance of Rallying

We Can Rally Just a Bit More

Energy stocks have a lot of complacency in them.