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Seeing a Pattern

Let’s look at how in the short-term we should rally some more, and then fall some, too.

The Market

I was going to begin this letter by avoiding mentioning the up-then-down scenario, just because by now it’s probably drummed into your head. But I can’t. Let me just show you a chart, so you can see what the pattern might look like.

Let’s take the chart of iShares Russell 2000 exchange-traded fund (IWM) - Get Free Report since I think it’s easiest to see it on this chart. I have drawn in blue an approximation of what charts should look like if we are to come back down and get a decent low, of the intermediate-term type. The levels need not be what I’ve drawn in, but the pattern would be helpful. In other words seeing this pattern in a variety of stocks would be helpful.

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We had a similar pattern at the May low. We did not have this type of pattern at the late March low (but in March the S&P 500 didn’t fall much and sentiment didn’t get so bearish).

I suppose we should also revisit the chart of Adobe (ADBE:Nasdaq) that we looked at last week, since that uptrend line has remained intact. That should now be the line in the sand for stocks with charts like that.

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In the last week I have discussed the TRIN quite frequently since we had two readings over 2.0, with Wednesday’s reading an astonishing 3.72. The 10-day moving average is useful with this indicator. You can see it doesn’t get this high very often.

So let me draw your attention to the left side of the chart, which was the last time it got this high. There were two such instances: August and October 2015 and January and February 2016. Please notice in both cases, the peak reading came with the first low and we came down again for a secondary trip. So in 2015, the peak reading was in August while the secondary low was October. In 2016, it was January then February (much closer together).

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On a shorter-term basis, the 10-day moving average of the put/call ratio has turned down, or at least is trying to do so.

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The 10-day moving average of the number of stocks making new lows has turned down as well. The chart is shown below.

But the chart I have my eyes on is that of the cumulative advance/decline line using common stocks only. In late July, I highlighted this chart since there was a negative divergence in place (see the red line). Friday’s rally took this indicator to a mere 31 points shy of the high from Aug. 13. The S&P is still 38 points under its Aug. 13 high. If breadth can outperform, then that would be bullish.

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So short-term, we should rally some more. But I still believe we will come back down.

New Ideas

We’ve had some success with Intel (INTC:Nasdaq) this year, so I have my eyes on it again. I think it is trying to make a small rounding bottom, but I think I might be a bit early. But somewhere in the $45-$47 range, it ought to make a stand. A significant break under $45, and I’d be concerned. That gap-fill at $48 probably stops it on the first try up.

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Today’s Indicator

The 10-day moving average of new lows has turned down (at least for a day).

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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.

Grupo Servielle (SUPV) - Get Free Report is another one of those Argentine stocks that collapsed last week on the news. I know it seems ridiculous that the measured target is basically zero. I would take the opportunity of a rally to $5, if it comes, to sell this stock.

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Westport Fuel Systems (WPRT:Nasdaq) hasn’t done anything wrong, but it’s hard for me to get excited about buying it. That’s because of that big decline from a higher high last week. It’s possible the stock now goes into a trading range between that $2.40 area and $3.20 (the spike high), since I think it’s going to take quite a bit of work to see this stock get up and over $3.20.

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Range Resources (RRC) - Get Free Report is in a down channel and with the lower end around $3.90-$4, but gets lower as days go on, it ought to bounce soon. But that’s the best I can say for it. And if it does bounce toward the top line, I’d sell lit.

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I had thought Cisco (CSCO:Nasdaq) might do well back in July when it made a new high, but instead it collapsed. There is a measured target in the $44-$46 area from that top, so I’d say it should find some support in that range. If you get lucky with a rally to $50, you can use that to exit.

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I don’t have a strong view on crude oil, except that no one seems to like it. So, I wouldn’t be surprised to see a rally up toward that line near $57. If it could rally to $60, it would change the look of the chart. I will say this: A break of $50, and we’d be talking about oil at $40 or less. The Daily Sentiment Index is currently at $52, so it’s neutral. A move under $50 would probably take the DSI under $20 in a hurry.

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