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Expect a Short-Lived Bounce

Too many people are betting on higher volatility and a lower market.

The Market

I am going to throw a lot of statistics at you tonight, so let me bottom-line it for you: I expect a bounce, but then I expect the market to go down again.

Why the bounce? Because the put/call ratio of the volatility index (VIX) sank to 18%. For the past 18 months we have seen a market rally within three days, most often within one day, when this put/call ratio sinks under 20%. The reason is that too many are betting on a higher VIX and a lower market. In addition, the McClellan Summation Index now needs a net differential of +4,800 advancers minus decliners on the NYSE to halt its slide. Typically, once we get over +4,000, the market is considered short-term oversold.

To this I can add that the Fear and Greed Index got to 10 today. The put/call ratio for exchange-traded funds (ETFs) moved over 200% for the second day in a row, showing too much put-buying again.

So why must we come back down, should we bounce? Because that is the standard routine. There were more new lows today than we've seen since February, and that needs to see a positive divergence. But this is easier to see when looking at the "what if" chart for the McClellan Summation Index. As noted above, we have reached a point where we tend to be short-term oversold with regard to this indicator. On the chart you can see that I have noted points A and B with black lines. Those are the peak readings we saw for the "what if" for the Summation Index. Note that we get a short- term rally and then come down again once the "what if" (blue line) gets this high.

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I don't want to confuse you with a ton of other statistics, because I would just prefer you understand that we should get a short-term rally -- and I understand that the employment number on Friday can throw a wrench into that view -- and then come back down again.

The correction that began in early July will continue, in my view.

Read Helene's latest column here.

New Ideas

I was asked to review the chart of the iShares 20-Year- Plus Treasury ETF (TLT) - Get Free Report, so although Friday morning’s economic data will push this around, I will try to be objective. As you know, I believe we are headed toward higher rates, but I see this much more clearly on the chart of the five-year yield than on the chart of TLT. On this chart, I see support around $113, or at worst $111. If Friday's employment number is quite strong and this doesn’t break $113, there will be a message: Shorting bonds is not the place to be.

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I continue to find the chart of yields on the five-year to be much more "bullish" than I find the chart of the TLT to be bearish. If the employment number is good and this cannot get up and over 1.80%, there is a message in that: Shorting bonds is not the place to be. If it goes through 1.80% I expect that folks will take notice in a hurry.

Just know that I keep waiting for this chart to go up (higher rates), and it disappoints me every time.

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Today’s Indicator

The 30-day moving average of the put/call ratio continues higher. Another reason I believe we are still in the correction phase.

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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.

That is really a nice base that is forming in BioMarin Pharmaceutical (BMRN:Nasdaq), but that resistance at $67-$68 is going to be tough to get through. I’d say that if you have patience, this is surely one to watch for signs it wants to break out. I’d like to see it spend some time trading around $62-$62.50 without going back under $60 so that the next time up it has the oomph to breakout.

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How did I miss the lousy retailer Staples (SPLS:Nasdaq) when I like the retailers? My sincere apologies, because this is really a great down-and-out chart. The problem with charts like this in companies such as this is that the rallies tend to peter out. I think it will try to fill that gap around $12.50-ish, though.

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I was asked to follow up on the chart of the SPDR Barclays High Yield Bond ETF (JNK) - Get Free Report, an exchange- traded fund to be long junk bonds. As I noted earlier, it’s hard to get decent price targets when the numbers are so small. This top measures to $40.40, and the uptrend line is at $40.20, so we’ll call it a range. However, the implications of this chart falling apart are bigger than just the chart itself. If the high-yield and junk markets back up, they tend to have a negative effect on the overall stock market. Glance over at the twin lows in late January and early February. Early February was a low in the stock market, but do you see the higher low in JNK? That tells us JNK leads. So this lower low today is not good.

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