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Will These Choppy Waters Rock the Boat?

If we get a down day Tuesday, I expect we’ll see less bullishness and more concern for markets, but it doesn’t have to unfold that way.

The Market

There has been a lot of chop in the market of late. I’m sure you noticed. I highlighted the chart of the iShares Russell 2000 Index (IWM) - Get Free Report, an exchange-traded fund for small caps on Monday morning’s “Top Stocks,” but it’s evident in all the major indexes.

Look at the S&P 500. Since gapping up on Nov. 1, the S&P seems like it’s been nothing but up. But that’s really a lot of sideways to my eyes. Take a look at the July high. Do you see the way there was a whole lot of churning and choppiness for three weeks? Or even the September peak. It took two weeks of milling around before the market cared (see the blue boxes in the chart below).

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The market does not always resolve these choppy periods to the downside. We had a choppy period in mid-October that resolved to the upside (green box). We also had one in mid- June.

The key is always what the indicators are doing. In the current situation, we have the market working off the overbought condition. We have the McClellan Summation Index rolling over (it now needs a net differential of positive 1,000 advancers minus decliners on the New York Stock Exchange to halt the current decline). We have the number of stocks making new lows, especially for Nasdaq, rising. Even the NYSE had the most new lows on Monday it’s seen since Oct. 31. It is quite typical for the chop like this to occur. I know most folks think we get overbought and immediately the market should go down, but as you can see from that chart of the S&P, that is rarely the case. It is more often that we stumble around, groping, trying to decide if we want to roll over or just digest.

I think after the kind of move we’ve had, it tends to be a digestion that gives us enough to wring out some complacency and let stocks correct. That often ends with a harsh down day or two. Notice I said “ends.” In other words, folks might turn bearish, if we turn down immediately, but if we’ve spent time chopping, and thus either not making money or losing some, and then we get a down day or two, it’s a lot more likely we see bears come out of the closet, thus ending the correction.

Patience is needed.

We have not had back-to-back down days in the S&P in more than a month. So, perhaps, we’ll stick with that and rally Tuesday. But should we get a second down day in a row, I expect we’ll see less bullishness and more concern for markets.

New Ideas

Several weeks ago, I thought the iShares Expanded Tech-Software ETF (IGV) - Get Free Report for the Software stocks was oversold enough to rally. I thought we’d see a rally to fill that gap at $215-$217. The gap was filled and it hardly mattered, as the chart kept going up. I have to acknowledge that a breakout over $220 would be impressive.

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Today’s Indicator

The 30-day moving average of the advance/decline line is not yet overbought.

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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.

I have been sucked into the vortex that Teva Pharmaceuticals (TEVA) - Get Free Report has been over the last several years, mostly into losing trades. Each time I thought it had developed a small bottom, it rallied and then gave way to a new leg down. I am constantly reminded that my mentor in this business used to say that Memorex (you might have to Google that one) doubled four times on its way from $300 to zero.

But with that as a caveat, yes, once again it appears to be trying to bottom. I think that $10 area is going to be tough to get through. But as long as it stays over $8, it gets the chance to do so. And if it can do so, then we’d be looking at a first target near $12 and another to close that gap near $14. I am in favor of it.

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Planet Fitness (PLNT) - Get Free Report jumped up right to resistance, similar to the way PayPal (PYPL:Nasdaq) did (see the chart in Monday morning’s “Top Stocks”). Therefore a pullback to fill that gap should probably be bought. It’s going to take quite a bit to eat through that resistance that is overhead.

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Shortly after Ulta Beauty (ULTA:Nasdaq) had gapped down, I warned that former growth stocks don’t tend to rebound quickly. That having been said, if this gets over $250, I think it can run to $270 in a hurry. After that, I’d say I’m unsure, because it’s only been two months since it broke down.

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Guardant Health (GH:Nasdaq) tumbled badly around August to October, and has since recovered. The good news: That top it failed from measured to around $60, so it achieved its downside measured target. But unless it can get up and over $75, I’m sidelined. The sideways action isn’t long enough for me to feel comfortable that it has done enough work (compare it to TEVA, which has done a lot of work for six months) and all the sellers are done. Crossing $75 would prove that the buyers can outweigh the sellers, giving it a first step at proving itself.

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