Note: My apologies for a shortened letter today. I was hit
by a car on Saturday while out walking. I am fine, just banged
up a bit. It is now Sunday morning and I already feel leaps
and bounds better. It’s just a bit difficult to sit at my desk
for long periods of time.
Friday’s action was actually what I expected we might have
seen on Thursday. The selling was relatively light, especially
in the small-caps. We haven’t broken the red line on the ratio
of the Dow to the Russell, but it did turn down on Friday. If
we are to be bullish for longer than the next week or so
(until we get back to maximum overbought again), this really
needs to break.
Elsewhere, the most extreme indicators on Friday arrived in
all the put/call ratios. For example, the put/call ratio on
the VIX soared to 206%. I had to go all the way back to 2011,
and before that 2010, to find another reading that high (over
200%). I am sorry to report there is no conclusion on it. Some
were bullish and some were bearish. It is best described by
looking at this chart of the S&P from the fall of 2011. The
high reading that arrived in late September, you can see, had
one more up day and then a fast decline of 10%. The one that
arrived a few weeks later in mid-October 2011 put us into a
week of chop and then upward.
This high reading in the VIX put/call ratio gets added into
the index and total readings, so they were quite high on
Friday. Remember that a high put/call ratio on the VIX (or
anything) is a big bet on the downside, so in this case
someone is looking for the VIX to keep going down, which would
imply he or she is looking for a rally in stocks. The bottom
line is this is yet another very extreme reading in an
indicator, something we have seen much of in the last few
months. I think it indicates that volatility is not going
away, despite the European QE announcement last week.
So, I think I’ll stick with the view that we are not yet
overbought (we are clearly no longer oversold) and that I
think we can have continued upside in fits and starts until we
get overbought later this week. If the indicators are still
bullish at that point, then we will reassess the rally.
I suspect the two charts folks will focus on this coming week,
due to the Greek elections and the FOMC Meeting, are the euro
and oil. Oh sure, they will watch the bonds, too. But in my
view, it’s the euro and oil that are the market’s main focuses
early in the week.
We looked at the CurrencyShares Euro ETF (FXE:NYSE) one week
ago and I noted I thought it could rally perhaps as high as
$116 before retreating again. It made it to $115 and then
collapsed once more. I am not a fan of catching a falling
knife, but in a market like this I do think it is once again
oversold enough to have a bounce, especially when we start
hearing calls for it to trade at parity to the U.S. dollar.
But is the decline over? Doubtful. Initial resistance -- if it
can rally -- will be at that $114 area.
Remember that a bounce in the euro generally means the dollar
Oil has become less of a focus for many folks because the
stocks aren’t crashing anymore. But the commodity is teetering
on the edge, as you can see from the chart of United States
Oil (USO:NYSE), an ETF to be long oil. If this breaks (it is
the equivalent of breaking about $45 on March crude oil) it
doesn’t measure that far --probably to $16.50. But it could
cause some panicking in the market and stocks.
The Hi-Lo Indicator, by virtue of the fact that the new high
list is expanding thanks to the Muni Bond Funds, is heading
higher. That’s supportive of the market.
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.
Lockheed-Martin (LMT:NYSE) has been making higher highs and
higher lows, so it hasn’t done anything wrong, although I
would prefer to see it break out over this $199-$200 area. If
it can do that, then the next target would be around $210-
UPS (UPS:NYSE) crashed and burned on Friday. I will admit
after Thursday’s action the chart showed no signs of
collapsing like that. There is a measured target around $100-
$102, so if you want to bottom fish this name, then use the
three-day rule where you wait until the third day after the
plunge and, if it is still in that $100-$102 area, the stock
can be bought for an oversold rally.
The chart of JD.com (JD:NYSE) is an interesting one because it
does seem to be trying to bottom. There is not a clear
breakout until it gets over $26, but you can see over $25
clears a downtrend line that has been in place for the last
five months. I would use a stop under $23 and with any move up
and over $26 we can then measure a first target of $28-$29.
But if the indicators don't improve over the next week, look for it to head back down in February.
A pullback would shake out weak holders and produce better-looking charts.
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