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The Rally Gets Narrower

Breadth typically shrinks when stocks are overbought, but swings in sentiment occur at a market high or low.

The Market

And today we had the chop-fest. Go back and look at this market: We reached a maximum overbought reading last Wednesday, when the S&P 500 tagged 1848 but closed down. And today it closed at 1845. If that is not a chop-fest, then I do not know what to call it!

There are many people asking if I believe this is a major top. I honestly do not know. In the days before machines did all the trading, and when the Fed was not as involved in the markets, it was easier to tell. These days, it is harder to call such a thing because of all the liquidity sloshing around.

But I can say that the rally has gotten narrower, as was shown by all those breadth readings I discussed last night. This is quite typical of overbought markets like the present one. What is not typical, though, is the way the sentiment has swung around.

On Monday, I noted that the put/call ratio for ETFs was the lowest since December 31 and January 2. Today, that same put/call ratio chimed in at 173%, the highest since mid-November. It was nearly as high on January 31, at 169%. They were right for a few days as the market finished its final push down, before it offered up an oversold rally from February 4 onward.

Typically, we see these swings in sentiment at market highs and lows. We know we are not at a low, that's for sure!

Then there are the Investors Intelligence readings. You might recall they peaked at 61% bulls in early January. At the time, I explained that in the previous 20 years we had not seen them get that high without the market experiencing at least a 3% correction. And we did get a correction in January. The survey in recent weeks showed bulls falling back to the low 40% area. But the readings are now back up to 53.5%. So once again, while not in seriously dangerous territory, they are now somewhat too positive.

There are plenty of stock charts with head-and-shoulders tops. We looked at 3M (MMM) - Get Free Report on Monday; we have looked at JPMorgan Chase (JPM) - Get Free Report before as well. We even considered that Macy's (M) - Get Free Report could be one, although we were undecided. You can see what happened today: poof, good bye head-and-shoulders top. I suspect that one day this manner of "saving" the charts will go away. Or shall I say it is my hope that this will happen.

In the meantime, I'll stick with the view that the current period is similar to late July. That was when we chopped about for a few weeks with plenty of ups and downs, and then went down for the retest. I think this 1840 area on the S&P is quite important. If the index cannot hold onto it, a retest of 1820-1825 would be the next step.

Read Helene's latest column here.

New Ideas

I am going to answer a few questions here, beginning with Apple (AAPL:Nasdaq). You might recall that I liked it around $500 but thought it would have an initial target of only $510. It reached that and more. AAPL has been leaking now for several days. My notes say that somewhere down in the $510-$515 range, Apple should bounce again. If it managed to get down there, you should be a buyer again.

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The next question is a follow-up on Goldman Sachs (GS) - Get Free Report, which I thought might be making a head-and-shoulders bottom -- a small one -- last week. That looked accurate yesterday, but foolish today. The line in the sand is at $162. The stock must hold here or I will declare myself dead wrong.

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Finally, in the search for bases, I was asked about Piper Jaffray (PJC) - Get Free Report. I had actually forgotten it was still a public company. But if the market can get going, this would be considered a base. There would be a first target around $43 and a longer-term target around $48-$50. I do not want to see it trade back under $39, because then it would look like a failure.

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Today's Indicator

The McClellan Summation Index continues to make higher highs. However, for the first time in a while, one harsh down day will stop this indicator from going up.

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Q&A

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.

We reviewed Verizon (VZ) - Get Free Report a while back and I had thought it should bounce off $46. Well, it tagged $45.50 first, but bounce it did. With no follow-through! Interestingly, the decline thus far has not made it back to the lower line. If VZ can rally before touching that lower line, that would be quite impressive. When a stock does not hit the lower channel line, it tends to rally better. For now, I will say the stock is in the channel. As long as it holds over $46, it is more bullish than if it comes down and tags the lower line.

I keep wondering if VZ is about 40% to 50% of the way through a bottoming process.

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AT&T (T) - Get Free Report, on the other hand, has a different look to it. The lower trend line is down slanting (not bullish) and the upper downtrend line is steep. Some might say the whole thing looks like a bull flag of sorts. I had thought T would bounce off $32, but I did not expect it to come back down. If it breaks that lower line, I will consider it a total failure. Otherwise, look for it to bounce off that lower line and stay within the range.

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In late December, when we were looking for the Dogs of the Dow, I picked IBM (IBM) - Get Free Report as one of the dogs that would rally. I currently view the chart as mediocre at best. I suspect that if the stock can mill around for another few days, it will make another rally attempt in early March to that line at around $190-ish. But it remains in a trading range between $170 and $190-ish on the upside. It might hit the mid-$190s, but I do not see it running away on the upside, just staying in the range.

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