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The More Concerned, the Better

Here’s why concern and oversold mean better buying opportunities.

The Market

Well, that sort of bounce is not going to change the mood is it? To which I say that’s the best news I have seen in a week. Why? We need sentiment to get bearish. We need folks to feel like lower prices are ahead. That is how we get to a better place in the market.

So far we haven’t seen much of a shift in the Investor’s Intelligence bulls since they were a too high 61.5% last week and only came down to 59% this week. But imagine if the market ends on a sour note on Friday? We might see these bulls retreat to the low 50s. It’s possible, isn’t it?

But away from that, we still have very little that has changed in the market. We have the major indexes still bending but not breaking — well aside from the Invesco QQQ (QQQ:Nasdaq). We have deteriorating internals and indicators.

If we look at a chart of the Sentiment Cycle, I think we were at Enthusiasm a few weeks ago. I think right now I would say we are just a little to the left of Subtle Warning. That’s the part where we bounce around and chop up and down for a while.

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Do not get put off by the magnitude on this chart, but focus on the pattern. While I don’t think we had the kind of enthusiasm we had in late August in early June, notice the pattern coming off that June high (blue box). It stopped at subtle warning if you will. But the point is the pattern is there: a “W” not a “V.”

If you think about it, let’s say we chop around for a few days and then in a week or so take a new leg down. By then, folks would be more concerned than they are now. By then the moving average lines of the put/call ratios would be higher. By then the Investor’s Intelligence bulls will have backed off. And imagine if we happened to break the 50- day moving average?

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Sentiment goes in cycles and typically as price goes down, folks become more concerned. And when folks become more concerned and the market is oversold, we get a better buying opportunity. That is why I say we want folks to get concerned. It gives the market a better set up. And concern often comes with lower prices.

New Ideas

A few weeks ago someone asked about S&P Biotech fund (XBI) - Get Free Report, an exchange-traded fund for biotech stocks. At the time, I noted that I thought a break of $110 was doable, but that it only measured to $100, which it tagged last week. I think it will take some work to eat through $110 on any rally now, but at least it can start some base building between $100 and $110.

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I was asked to follow up on DraftKings (DKNG:Nasdaq), which I liked a few weeks ago, and hasn’t done very much. Well, it pulled back and is right back where it was a few weeks ago. I still think it acts OK. I just don’t want to see it crack under $35.

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Today’s Indicator

The Volume Indicator is worth paying attention to again, because it is currently at 49% and readings in the mid- to low-40s get this intermediate-term indicator oversold.

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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.

If I didn’t know what stock Virgin Galactic (SPCE) - Get Free Report was (i.e. such a speculative name) I would like the chart. It might take a while to flesh out and go sideways for a bit, but as long as it stays over $15, I think it gets the benefit of the doubt.

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Domino’s Pizza (DPZ) - Get Free Report needs a rally to relieve some of the oversoldness. I think there is a high chance this stock then breaks this recent low area around $380. I’m just not sure where I would know if I were wrong (i.e. no idea where to put a buy stop).

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Exxon (XOM) - Get Free Report has guaranteed us its dividend is good for at least the time being (is that six months? A year?), so at some point you would think the dividend makes it worth something for a rally, but if I forget the dividend, then that break at $40 measures to $35-ish and possibly $30. If you want to buy it, I would use a stop under Tuesday’s low area, since that was also the low back in mid-April. A failure to get up and over $40 would be a red alarm.

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