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The Market Has Become Very Emotional

Chatter moves from V-bottom to "W" and back to V in a matter of hours.

The Market

You would think there is much to say after a day like today but there isn’t. What was interesting to me was that the big gap up was actually faded and then went right back up. What I think is also interesting is last Tuesday, after we rallied, the chatter was V bottom. Then we came back down and the chatter went from W to ‘look out below’ because we broke the previous lows. Today the chatter is back to V bottom. A market like this is quite emotional as you can see.

First let’s discussion the notion that a lower low is bearish. It is not. Not if there are positive divergences as there were last Thursday and Friday on the NYSE when we made lower lows in the indexes and there were fewer stocks making new lows. If we don’t like higher highs in the index with the number of stocks making new highs contracting then the inverse is what we should like: lower lows with contracting new lows.

There is plenty to pick on in today’s rally. Breadth was very mediocre for such a big day. The small caps lagged. Bonds were flat, showing no indication they are ready to turn up (rates down), and most stocks hit their first resistance and just couldn’t get through. While it’s hard to say we’re oversold after the rally we’ve seen already, we are certainly not overbought. The Hi-Lo Indicator made it to 13% today so it is solidly under 15%, making it the first intermediate term indicator to get there.

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But back to the discussion about V bottoms. This is typical after the initial rally. This is how sentiment shifts, from scared (Thursday and Friday) to wiping the brow and feeling better (today). If we continue to rally later this week (I think we should enjoy some more upside, although not in a straight line) the talk of needing a retest and Ws should subside to the point where V bottom is all you hear. It is not until everyone who was scared last week gets back on the V bottom bandwagon that we can come down again. So as much as there were issues with today’s rally we are not yet overbought. Even if we retreat some in the next day or so I think I am inclined to believe we would rally again later in the week.

New Ideas

Let’s follow up on the only stock I thought was buyable late last week (I was more interested in indexes). Apple (AAPL:Nasdaq) has rallied to a first resistance level (red line) The obvious resistance is the black line ($167-$168). Let’s say AAPL pulls back from here, isn’t it possible it forms a very small and funky head and shoulders bottom? If I traded it well I would take some profits because it’s up about ten bucks in a straight line, but overall I’m inclined to think a pullback right now is not bearish. Not yet.

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Today’s Indicator

The 30-day moving average of the advance/decline line is not yet oversold. Notice it didn’t even lift in the last two days.

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Q&A/Reader’s Feedback

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I am inclined to think the rally in Philip Morris (PM) - Get Free Report will stop in that $104-$106 area but I am open to believing it goes farther. Why? Because it has already traded over last week’s intraday highs (post the Monday decline). So My guess is it stalls at $104-$106 the first time up so I would sell some there just to be sure.

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The VanEck Vectors Gold Miners ETF GDX acts better than Gold does. At this point my best guess is it runs out of steam around $22.75-$23. Then we’ll see if another pattern sets up.

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Spartan Motors (SPAR:Nasdaq) held up rather well last week which is probably why it is down in today’s market. I am inclined to think it can rally more but I will keep a close eye on it because if it turns south before it can get over $17 it is going to look like a head and shoulders top. For now a rally to $17.

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The good news for the Vanguard Real Estate ETF VNQ is that the measured target was around $75. The bad news is it blew right through there and has been unable to recapture it. It is oversold enough to bounce but there is no pattern set up for me to do more than wait for one now.

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