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Well Done? Looks a Bit Overdone.

The entire correction doesn’t feel like it’s over yet, but in the very near term, it feels a little overdone -- and it looks like we have a change in sentiment in the works.

The Market

It feels a tiny bit overdone on the downside, doesn’t it? Don’t get me wrong, the entire correction doesn’t feel done yet, but in the very near term, it feels a little overdone.

The McClellan Summation Index now needs a net differential of plus 2,400 advancers minus decliners to halt the decline. That means this particular indicator stepped a toe into oversold territory after Friday’s rout.

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The total put/call ratio jumped to 113%, a reading we haven’t seen in two months (early June was the last time). The equity put/call ratio flew to 87%, which we didn’t even see such an extreme in the May decline; we have to go all the way back to the December decline (when we saw readings higher than this). So, that tells us we have a change in sentiment in the works.

The volume in the Invesco QQQ Trust (QQQ:Nasdaq) was high for the second day in a row. Typically that means we should see a short-term bounce.

The S&P 500 has been red for five-straight days, which is unusual. Nasdaq has been red for five straight days, as well. It hasn’t gone to six in almost three years. Just prior to the November 2016 election it went nine-straight.

I wouldn’t call the Volatility Index jumpy -- yet – but it did close in the red on Friday, despite the indexes closing significantly lower. That probably means it needs a rest from the relentless upside we saw in it last week. It is not often the VIX goes from 12 to 20 in less than a week.

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Then there are the 50-day moving average lines. So many indexes got down to this well- watched level, so it would make sense that we see a short-term bounce from the area. See how in May we broke it, but snapped right back up the very next day?

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But notice on the S&P chart what happened after that bounce: We came back down again. And that is the sequence that is typical. A move down that at first doesn’t do much to squeeze the complacency out. Then it continues so the complacency evaporates. But they don’t really move to serious fear, they move to what I call the fence-sitting camp.

That relief rally (like mid-May) keeps them fence-sitting and wiping their brows. And then we should come down again. That second time down is what typically takes the 10-day moving average of the put/call ratio up to lofty levels. It is not there now.

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That second time down is what moves the intermediate-term indicators to a much better oversold condition. For example, the Volume Indicator was 52% (still overbought) last week and now it’s 48%. Another few points down and it will get back to oversold so it’s not quite there yet.

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For now, the number of stocks making new lows continues to expand; that needs to contract. My own Oscillator is not oversold. The Nasdaq Momentum Indicator doesn’t show me an oversold condition until later this week. In other words if we do rally Monday – we should at least attempt it – I would not consider us at a “good” oversold yet, but at least we are heading in that direction.

Finally a word about bonds. The Daily Sentiment Index is now at 93. And, curiously, the utilities did not rally much on Friday. My guess is the bonds have one more day of rallying in them at most before they back off a bit.

New Ideas

A question came in about Netflix (NFLX:Nasdaq) a couple of weeks ago, and I had said there was a target near $300, so if we got down near that level in two weeks, I’d get interested in the stock for a trade. I think if the market bounces this week, Netflix can rally, too.

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Today’s Indicator

The number of stocks making new lows continues to expand.

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Q&A/Reader’s Feedback

I want to begin this section by answering a question I got, with a chart as an example. The question was about the targets I measure for various stocks. I never know if the target is a short-term way station or an actual high for an extended period of time. And the targets are not perfect. If it turns out one was spot on, consider that pure luck and not much more.

A good example is PayPal (PYPL:Nasdaq). I recommended this chart early this year, because it was breaking out of an extended sideways move. I had a measured target around $108-$110. When it got there, I suggested some profit taking. That’s the arrow on the chart.

The stock then chopped about and went sideways for about six weeks, and then it had what appeared to be a new leg up, but was really a bit like a last-gasp rally, since here it is right back at $107 now.

The chart might just go into another extended sideways move as it did in 2018 or it could fall all the way back to support near $90. All I know is that the stock reached its target and after that you need to keep a tight stop on it if you want to continue to ride it.

What do I think of PYPL now? I think it has a little support around $105, and would expect a bounce shortly. If that bounce fails under $115 then I think PYPL could very well break $105 the next time down and that would then measure to – $90.

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Walmart (WMT) - Get Free Report is a stock I recommended several months ago, but when it got to the $112-$115 area it had reached my target. It has a little bit of support right here around $107-$109 and should rally, but if it rallies to $111-$112, I’d be inclined to sell it. I think the best it can do is go sideways now and maybe even break back to the lower line.

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I would not know what to do with Nestle (NSRGY) - Get Free Report. It’s been terrific and has done nothing wrong. So as long as it doesn’t beak that uptrend line it’s a hold to me.

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