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A Healthy Dose of Selling

This prolonged negative breadth is likely to move stocks into stronger hands.

The Market

The most remarkable part of the day's action is that the NYSE breadth was negative for the fourth day in a row, something that has not happened all year. In fact it last occurred in early December last year.

Let me explain why that is exactly what you want to see. Most of you can probably repeat this back to me, as you have heard it a hundred times, but once again: If we get a string of selling, then we can get a decent oversold condition. If folks actually sell stocks, then rallies can have more oomph when they arrive.

I often discuss a "cleanout," and that’s what I mean; the market is a cycle as we go from strong hands to weak hands to strong hands again. The selling typically comes when we have weak hands. When those weak hands are done (i.e. the selling is done), the path upward becomes easier, as there is no one (resistance) in the way to stop the rally. While the S&P 500 is only back to 1970, where it was a month ago, the Dow Jones Industrial Average -- where all those big-caps live -- is now down 200 points, but more than that, it has been red for six of the last nine trading days. It continues to hug that uptrend line we looked at on Monday (the S&P hugs the one we looked at yesterday). So there are no breaks in these uptrend lines – yet.

I am sure you noticed that the Russell 2000 outperformed the S&P today, because it was moderately oversold. If it were at a terrific oversold condition, I think that early morning rally would have stuck a lot more. It remains moderately oversold.

What I would love to see is a break of the Monday morning lows in the major averages that is accompanied by fewer stocks making new lows. That would be a positive divergence to accompany the oversold condition. However, until we get that, I still consider this a market that got saved and therefore one that cannot rally that well.

Read Helene's latest column here.

New Ideas

Last night we looked at the WisdomTree Japan Hedged Equity Fund (DXJ) - Get Free Report with a positive view, so today I want to show you the chart of Honda Motor (HMC) - Get Free Report. That is an interesting base. There is a mini breakout at $36, which should run into resistance just over $37, but then pullbacks to $36 should hold. Eventually this base measures to the $40-$41 area.

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Someone asked me about Post Holdings (POST:Nasdaq) not long ago, and I was negative on the chart. I want to follow up by nothing that if it breaks $46, it will complete the head-and-shoulders top, and it has a target down in the low $30s on a longer-term basis. If the stock can rally back over $48, I would consider myself wrong.

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Also, someone asked about Salesforce.com (CRM) - Get Free Report a while back, when the stock was in the $52-$53 area. At the time, I was lukewarm on it, although considering that the stock ran to $59, I should have been much more constructive on it. It is holding well here, and while I am not a fan of the longer-term chart, I would say that if it can get over these recent highs around $55, it can and should run to the $58-$60 area again.

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Today’s Indicator

The McClellan Summation Index is still heading down (bearish)

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Q&A

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 had high hopes for iRobot (IRBT:Nasdaq) at the beginning of this year, thinking it had built a big enough base to launch a decent rally. I was quite wrong. It rallied and fell, and now it languishes. It has been nothing but straight down for a week and a half, so it is a bit oversold down here, but if it cannot recapture $35 in a hurry, there is a first target down at $31-$32 and another near $26. I think I would rather stay away from this one now.

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The best news I can offer for the semiconductor company Marvell Technology (MRVL:Nasdaq) is that there is a measured target near $12.50-$13. Therefore I suspect it will bounce and retreat one more time, and then it has the chance to start some base-building. For now, I’d sell a rally toward $14-ish.

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Finisar (FNSR:Nasdaq) is trying to form a base, but there is an unfulfilled target around $17, so I am skeptical that any bounce can be long-lasting in this stock. Away from any trading thoughts on this, you can see that the stock has been trading between $19 and $21 for a month and a half. If it continues for another two to three months, it will have formed a rectangle, and that would make it quite intriguing as a long to me, even if it never gets to the target of $17.

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Rectangles are not terribly common when the market is at its highs, but to give you an example of a rectangle, you might recall that in late May we flagged SAP (SAP) - Get Free Report as a rectangle when the stock was at $74, so you can see that rectangles can be lucrative if you have the patience to wait them out and let the pattern form.

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