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Testing 1...2...3

Testing is the answer for the coronavirus, just as testing and retesting are the answer for the market.

The Market

About the only change in the indicators late last week is that breadth began to weaken toward the end. This means that if we don’t get some positive breadth readings in a hurry the McClellan Summation Index, which has flattened its curve, will roll over. We want to flatten the curve when it comes to cases of the coronavirus, but not when it comes to this indicator.

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As I noted last week, the number of stocks making new lows is up, but not anywhere near where it was a few weeks ago. But the 10-day moving average of new lows is likely to head back up this week. It’s just the math, but it goes along with the market having reached a short-term overbought reading last week.

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But what I would really like to do is answer a question I was asked last week. Are there any bases out there? The answer is this: If there are, I have not seen any. I might make the case that Gilead (GILD:Nasdaq) is still one, even though it broke out and has already achieved its upside objective. In other words, it is possible that it is now in a new trading range, between $68 and the mid $80s, where it will spend months building a new base to launch higher. But if you want to see what a base looks like, that’s the period from last summer through January. There aren’t many charts like this.

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Clorox (CLX) - Get Free Report is another chart that built a base from last summer through January. Here too it has achieved its upside objective, so perhaps it now spends the next few months building a new base over $160.

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Then there are charts like General Mills (GIS) - Get Free Report, which if they didn’t have those wild swings in March might look like a base, but even at that the measured target is only $60, which has been achieved already. So here we say if it can spend a few months back and forth between the mid-$50s and $60, maybe it can build a new base.

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I’d love to tell you Walmart (WMT) - Get Free Report is a base. It is more of a potential base than many others, but I prefer bases when they are at the bottom of the page, not the top.

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What I would like to do is take you back in time, to the early 2000s. As we know the tech bubble burst in March 2000, but it wasn’t just tech that collapsed then. Here is Goldman Sachs (GS) - Get Free Report, which basically halved over the ensuing few years. What I want you to focus on is that period from 2001 to 2003. That was two years of basing. That was two years of trading between $50 and $75.

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Now, take a look at what the stock did after it built that base and broke out in April 2003. It had a nice run to $90, came back and retested the breakout in the summer of 2004, building another base between $70 and $90. Until it finally broke out two more years later in the fall of 2005. It then more than doubled before topping out.

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Not all charts are going to take that long, but my point is bases that are six-to-eight months in duration are not the same as bases that are years in the making. All we have now is a handful of stocks with six-to-eight months of basing. So, when I talk about tests and retests, I want you to think about stocks and their charts.

Currently, most charts look more like GS does now. They have broken down and will need months of ups and downs to form any sort of base. Even if GS, or any other stock with a chart that looks like this, and most do, rallies from here, it’s only made its low a few weeks ago, and even that’s a maybe. That’s to say this is a very long process. Even if you catch the exact low, or close to it, the basing period will take time.

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One more point on this. If you do the same exercise we did with Goldman and do, say, Intel (INTC:Nasdaq) you would see that seven years after the 2000 top, near the 2007 top, Intel had still not made one higher high. Not one.

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We will eventually start the basing period, perhaps we already have, but bases take time. The market and individual stocks need time to find where buyers live and sellers live and that simply does not happen quickly, no matter how much we want to speed things up. Testing is the answer for the coronavirus. Testing and retesting are the answer for the market.

New Ideas

I’ve had a lot of questions about Johnson and Johnson (JNJ) - Get Free Report, so let’s take a look at it. It’s got one heckuva downtrend line that if crossed would make me feel better about the stock. Let’s be clear: There is still quite a bit of resistance overhead, but crossing the downtrend line is the first step toward improvement.

There would then be decent resistance in that $140 area. But it might then begin a process of testing and retesting as I have drawn in blue. The best news for JNJ is that the top is not that big, only a few months in duration.

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Today’s Indicator

The new lows are discussed above with the chart.

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.

United Airlines (UAL) - Get Free Report is getting oversold again as it comes close to the late March lows. I would expect a bounce this week. But I would sell the bounce because bases take time to build, so I don’t think UAL is going to run away on the upside. If it can get to that downtrend line (currently $35 but declining) that would be a great place to sell some.

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The good news for Caterpillar (CAT) - Get Free Report is that it has held its rally. Another good thing is that the top has a first measured target near $90, which was achieved. But that gap fill overhead, which has basically been filled is probably a good place for resistance to start. I might have another look at the chart on a pullback to that triangle, near $100.

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If Abbott (ABT) - Get Free Report were lucky enough to fill that gap at $87, I’d sell it there.

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