Well that was an interesting day.
For the third-straight day breadth was red. Now, none of the days saw breadth terribly red, but it is the first three day stretch since early August – that’s three months. As I noted Wednesday, what we don’t want to see is the S&P rally and breadth lag. Heck, breadth did more than lag Thursday. Let me remind you the S&P was up 8. That’s a divergence. It’s small, but it’s a divergence. You can see it on the chart of the cumulative advance/decline line below.
It has caused the McClellan Summation Index to halt its rise. I would say it has rolled over, but honestly if you can’t really see it clearly with your eyes, then it’s probably not a big enough deal. Yet. But I have blown up the chart so you can see it.
Then there is the number of new lows for Nasdaq. They now chime in at 91. That is concerning, because Nasdaq is at an all time high and there are almost 100 stocks on the new low list. The 10-day moving average of new lows is still hovering flat, but if this keeps up, it will rise.
The new highs were fewer than they were earlier in the week, but that’s probably because the Russell 2000 did not make a higher high. In fact, it acted pretty poor.
But the real discussion is on bonds. The iShares 20-plus Year Treasury Bond fund (TLT:Nasdaq) collapsed. I thought that $136 area would hold the first time down, and I suppose if we draw a thick line — like using a Sharpie instead of a pencil — perhaps this is “it.” The next few days will be a tell, to see if bonds can rally. The DSI is currently 30, so it might need more time before we see true panic.
This also means the utilities are at a critical level as well. The Utilities Select Sector SPDR fund (XLU) - Get Free Report is sitting right on a long-term uptrend line. My rule when it comes to the utes is different than most. Most folks prefer when utes aren’t leading. I say you do not want utes to be the only group that goes up, but in general utes going up means interest rates are not screaming higher. Stocks react to interest rates, so if rates are screaming higher, eventually stocks in general will not like higher interest rates. I consider utes an early warning sign, so if they start to break down, eventually it will weigh on all stocks.
The bottom line is while Thursday’s statistics were not great and there are some divergences developing, it still looks like a chop or pullback to me. If these divergences continue it will pay to be more cautious.
I want to take a minute to review the chart of Energy Select Sector SPDR fund (XLE) - Get Free Report, because I was asked about oil stocks in general, over a more intermediate-term time frame. In the near term, I liked XLE a few weeks ago and it has performed OK, mostly in fits and starts. You can see there are layers and layers of resistance all the way up, so it’s difficult to say what would make it a breakout.
What I can say is that if XLE can cross over that downtrend line, it changes the picture because this downtrend has been in place since the spring. What would make the chart improve much more is if it can map out as I have drawn in blue. That’s because then it starts to take on the shape of a bottom instead of an oversold rally.
We had a terrific trade with Valero (VLO) - Get Free Report, but I also think HollyFrontier HFC is a decent chart. I have written it up before as a positive chart, but it has not done nearly as well as VLO. If it can spend some time doing work between the blue and black lines, then I think the next time it rallies it shapes up much better.
The 10-day moving average of the put/call ratio is too low for my taste – too much bullishness. Now the 10-day moving average of the equity put/call ratio has joined it in being too low.
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The SPDR S&P Biotech exchange-traded fund (XBI) - Get Free Report has been in a downtrend since the spring. Until it can get over the downtrend line that remains the case. But a pullback into that $78-$80 area that goes no further would make the last three or four months look like a head-and-shoulders bottom. So it’s possible to turn bullish on this with a crossing of the downtrend line or a pullback that stops in the right shoulder zone.
I am trying to ignore the gaps on Ambarella (AMBA:Nasdaq) and just focus on the triangle and the triangle is a pattern of indecisiveness, which means we have a stock trapped between $52 and $60 right now. I’ll leave it at that because of all those gaps on the chart I’d be inclined to wait for something more decisive.
STAAR Surgical (STAA:Nasdaq) seems to be building a base, and a long one at that. I would like to see it go sideways or correct just a bit from here so that it has some energy for when it’s time to break out. If it just keeps running from here it will exhaust itself on the breakout. A pullback toward the blue line would be helpful.
Baidu (BIDU:Nasdaq) has a nice base, but it gapped up to first resistance. There are so many gaps it’s hard to keep up so the first target is around $128 for that gap fill. It would be best if BIDU can map out the pattern I have drawn in blue, since that would give me confidence it wants to fill that big gap up near $150.