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Watch Your Step ... Indicators Are Starting to Roll Over

Not all of them, but some indicators are starting to show divergences.

The Market

Ever since the market reached a short-term overbought reading nearly two weeks ago, I have said if the indicators roll over, I will become more cautious.

In the last few trading days some – not all — of the indicators have started to roll over.

In the last two trading days, for example, Nasdaq has seen more than 90 stocks making new lows. That in turn has caused the 10-day moving average of new lows to turn up. Yet, just this past week Nasdaq saw the most new highs in more than a year.

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The McClellan Summation Index has rolled over for the New York Stock Exchange. It will only take a net differential of positive 600 advancers minus decliners on the NYSE to turn it back up. But you can now see the rollover on the chart. For Nasdaq, however, the indicator is still rising.

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Small caps relative to large caps have made very little progress in the last few weeks, since we got overbought on a short-term basis. They have still not taken out the mid- September high, either. Yet there has been no discernible decline. It’s more like treading water.

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Sentiment-wise, we have the American Association of Individual Investors bulls up at 40%, which is on the high side, but not extreme. We have the Investor’s Intelligence bulls at 58%, the highest since July. It somehow feels like this should get over 60% before we decide we’ve gone too far. The Fear and Greed indicator got over 90 this past week, which is definitely in the giddy camp.

The 10-day moving average of both the total put/call ratio and the equity put/call ratio are very low. That is a sign of a high level of complacency.

Yet, the Market Vane Bulls and Consensus Bulls, while not perfect indicators, are far from any peak we’ve seen in them. Consensus Bulls aren’t even at 60% yet.

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The Citi Panic/Euphoria Model is finally over the zero-line, but nowhere near the Euphoria level we’ve seen at past highs.

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Now let’s move on to bonds. I’m going to use the yield on the 10-year Treasury note for this. You can see in this 1.90% area resistance exists from both the downtrend line and a prior low. The DSI is now 26 on bonds. A month ago everyone thought we’d see nothing but lower rates, now they think nothing but higher rates. If that DSI goes under 20, I will have to look for bonds to rally and rates to fall, and the iShares Barclays 20-plus Year Treasury Bond fund (TLT:Nasdaq) goes up. But, ultimately, I think rates will go higher (how else will the Bank Index eventually get to that $120-$125 target I have?).

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If bonds rally this week, it’s possible we see an improvement in breadth and the indicators turn back up. In July it took just over two weeks of divergences before the market cared. So while it’s hard to love the market here based on the indicators, it’s hard to be terribly bearish right now, too.

I think we’re in a chop mode, because if we look at the Russell 2000 (using the iShares Russell 2000 Index (IWM) - Get Free Report) since the calendar turned to November, you can see the chop-fest that we have had. I think if it decides to rally and take out the spring high, we’ll see all those indicators that show high levels of complacency push into Euphoria in a hurry. And then we’ll see if the indicators are confirming the move or still rolling over.

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New Ideas

As a follow up to the oil discussion from late last week and the chart of Apache (APA) - Get Free Report, which had been asked about a few weeks ago. It tagged that first resistance at $25 and backed off and is now trying to rally again. If it can get through this $25-$26 area, then it should make a try for that spike high in September.

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Today’s Indicator

The new highs and new lows are discussed above with a 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.

I have been bearish on PaylPal (PYPL:Nasdaq) for a long time, but I was asked if the post earnings rally changed the look of the chart. It certainly helped, because it crossed that downtrend line. But it has since given it all up and retreated again. I do think anywhere between here and that downtrend line it should see a rally again, but it seems to me there will be a lot of resistance the whole way up now. But a near-term rally is not out of the question.

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For Canopy Growth (CGC) - Get Free Report, which I was asked about in October, I drew in a rally to that resistance from the downtrend line and prior lows, thinking it would have to go up and come back down. It has done that, but now it has come back to the line. Crossing that line is key, because it is a downtrend that has been in place for six months. It would certainly help the bottoming formation.

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I was also asked about the iShares Nasdaq Biotechnology Index (IBB:Nasdaq). I liked it in September, just before it collapsed a quick 10% to that early October low. So, I was wrong. I am still fond of it, but it really needs to cross this line since that would cross the downtrend line and take out the July high at the same time. It still has resistance all the way up, but crossing the line could give us the pattern I have drawn in.

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