No Market Is an Island. But an Island Top Would Be a Bad Sign.
Let's dig into the indicators to see what could happen next.
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The Market
Do you realize those were the first consecutive red days for the Russell and Nasdaq since the low a month ago? I know I was surprised. And yet the market doesn’t feel as though it is down very much, does it?
In fact, the S&P closed pretty much where it closed last Thursday, the day everyone decided the fundamentals weren’t so bad because, y’know, a few tech companies didn’t cut their cap ex. But I digress.
This remains the sort of pullback we ought to get from such an extreme overbought condition. We backed off from resistance, as we should have. We’re backing off from the overbought condition, as we should have. The VIX is rising, but not terribly extreme (as it should have).
So why should we rally again once this overbought condition is worked off? Because that is pretty standard. Do we have to rally to a higher high? We do not. In fact, that is exactly what another rally would bring us: a good test of how strong the buying is.
For that, we watch the intermediate-term indicators. The McClellan Summation Index (shown below) is still rising. We came into this week with the indicator needing a net differential of -4200 advancers minus decliners on the NYSE needed to halt the rise (something that made it overbought). We are now at -1900. That’s quite a change.
The Hi-Lo indicator for the NYSE is at .59 and still rising, but today was the first time in two weeks that there were more new lows than new highs on the NYSE. The Nasdaq’s Hi-Lo did stop going up today. You have to squint to see it. However, today, saw the number of stocks on Nasdaq making new lows jump to 110, the highest reading since April 21st. This is worth paying attention to.
I am a firm believer that time is a factor in the market, and sometimes just because we see it, we think it ought to happen right then and there, yet the market has other ideas. Some of the signs are there that after this pullback the rally will lack, but there are not enough signs for me yet. So we’ll let it play out.
In the meantime, there is a little gap just under where we closed (5569) on Tuesday. The one thing you don’t want to see is an opening gap down under that with no recovery, because that would leave the last four trading days as an island.
New Ideas
I want to talk about the chart of Texas Instruments TXN. It had better-than-expected earnings about two weeks ago—that’s the gap up from 145 to 160 on the chart. But notice that the rally lasted two days, and while it popped last Friday, it really hasn’t made any headway since the gap on earnings. That is the chop I talk about. A lot of charts have it.
But, there is also that spike high from the April 9th turnaround at 170. And the resistance at 175. Another rally in TXN after the overbought is worked off is going to be a good tell. Can it exceed last Friday’s high at 166? And if it can, does 170-175 stop it in its tracks? Over last week, and it’s not so bad. A failure to get over last week’s high, and it will likely start to show up in the indicators.
As you go through your charts, I am sure you will see plenty of stocks that look like this.
Today’s Indicator
The McClellan Summation Index is still rising. It is discussed in full above.
Q&A/Reader’s Feedback
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The question is where would I buy Berkshire Hathaway BRK.B, and that chart is not my cup of tea, so I can’t say where I would buy it right now. The pattern is a sideways nothing right now. If it came down to the 480-490 area in the next month or so, I’d probably take a look at it because it would be at support from the uptrend line and the flat line. But right here at 515, it’s in the middle of nowhere.
I would very much like Dollar General DG to fill that gap, but I think that might be a very tall order. However, the 90/100 rule ought to apply (90% of the stocks that make it to 90 will make it to 100), so it should get to 100. I also have a measured target from that base, around 100, and another at 105, so let’s call it 100-105.
We had a great trade in Pepsi PEP earlier this year, but the stock is in a downtrend. It’s probably okay to bottom fish around 130—ish, but the resistance at 140 is formidable now.
We know I am a fan of Uber UBER and have been for quite a long time, but it is knocking up against the old high from October, so I’d like to see a pullback near 80-ish or some sideways action.
