TSC: Another Indicator Turns Too Bullish By Helene Meisler
12/09/2002 09:17
Last Monday I reviewed some of the traditional sentiment indicators, stating that while they weren't bullish, some weren't yet extreme. Then on Thursday, the day after the Investors Intelligence numbers were reported, I showed how this survey of advisers showed that more than 50% were bullish, reaching the highest level we've seen since the rally began.
Of course, you have to find that somewhat amusing because the market is essentially where it was a month ago. Still, folks have gotten even more bullish as time goes on.
We can now add the Specialist Short Ratio as too bullish. I had thought this would move to very bullish readings a week or two ago, but it steadfastly refused. But this weekend the indicator moved up over the 40% level, to 42%. Sure, it's been higher, but it hasn't been over 40% throughout this entire rally and not since the highs of last August, when the reading was 43%.
The put/call ratio (on a 21-day moving average) was already too bullish and has remained that way.
These three indicators aren't short-term in nature -- short term is when the put/call ratio gives us readings in the 90 area four days in a row, which it did last week. There's no steadfast rule about how long that can go on, but typically it leads to some sort of short-term rally to relieve the bearish stance so many have taken.
So in the very short term people are beginning to lean a little toward the bearish side, although that might have been related to the Iraqi deadline this past weekend. However, the Nasdaq will be oversold sometime after Wednesday. Pinpointing the exact day this indicator will reach maximum oversold is difficult, but anytime after Wednesday we'll be sufficiently oversold to get a rally.
With this in mind, I'd like to examine the chart of Novellus NVLS . In the first chart you can see Novellus is sitting very close to support in the $30 area. The stock should put up a fight to hold that area this first time down.
In the next chart I show how the stock appears ripe for a rally, at least one that would fill the gap it left this week when it was downgraded.
The next chart shows what happens when we fill the gap. There are plenty who subscribe to the belief that all gaps must be filled, and once filled, reverse course. I've seen it happen, but to be fair I have also seen it not happen. Novellus does have that resistance overhead in the upper $30 area in addition to the gap, so I expect it to get up there on an oversold rally, but turn lower afterward.
You can see the pattern that forms if such a scenario occurs. The chart develops a head-and-shoulders top.
Now for the bullish aspect in all of this. The head-and-shoulders top would measure to about $22. Take the high of the pattern minus the low of the pattern ($38 - $30 = $8) and then subtract $8 from the neckline ($30 - $8 = $22) to get the target price. Under this scenario, $22 would be a higher low than the October low, and that would surely help as part of the basing process, a process that needs more time than we've seen so far.
To sum it up, the intermediate-term sentiment indicators -- along with several other intermediate-term indicators -- aren't lined up for a great rally, but they are all pointing to a market that's late in a rally phase and needs more work on the downside. The shorter-term indicators are saying that by the middle to the end of this week we should see some relief from the downside action we had last week.
When we look at the Novellus chart, we can see how it needs a rally, but then we can see how that works into the intermediate-term indicators signaling that it will be just an oversold rally that fails.
Note: I'll be en route to the U.S. as you read this, and I'll be traveling around the country for the next few weeks. I may not have a chance to read and respond to your emails on timely basis, but I do plan to write my column for the remainder of this week. |
