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Expecting Downside this Week Makes Sense

Even some choppiness would do -- anything to work off that overbought reading.

The Market

I was quite wrong on the market today. I thought there was no way we could soar up 20 handles, and yet we did. Sure, we gave back half of the gain by the closing bell, but it was still more than I imagined.

And we are still toying with these old highs on the S&P 500. The whole world is so focused on 1850 that a move up from here that sticks will likely turn people bullish and a move down will turn them bearish. As you might imagine, based on my comments this morning, I would still like to see some downside this week. And after today's action, I feel even more strongly about that.

You see, if today's rally looks like a failure, then we can get folks to short. And if they short then as we get back to an oversold reading, then we can rally again (in early March).

However, if we insist on doing what we did today, then I fear the overbought market will do more churning up here than anything else. Let me explain that with some statistics, comparing last Thursday with today. Last Thursday (Feb. 20), the S&P gained 11 points and the Nasdaq gained 29 points. That is pretty much what the gains were today, so we will be comparing apples to apples.

Thursday's net breadth on the NYSE was +960; today's was +700. Thursday's net volume on the NYSE was +1.645 billion shares; today's was +800 million (yes, half). Okay, there will be those who rationalize this volume change by noting that sales of Verizon (VZ) - Get Free Report were down by 300 million shares. It's true that if we backed that out, the volume change from Thursday would not be so awful. But even if we back out the 300 million shares and add it back in (rationalizing an indicator, something I hate to do!), we would still have a net positive of +1.1 billion shares vs. 1.6 billion shares last week. The story is the same; only the magnitude is different.

Over on the Nasdaq, net breadth was +1070 last Thursday. Today it was +760. Net volume was +1.2 billion shares then, compared with +830 billion shares today.

So no matter how we look at it, today's rally did not have the same momentum as last Thursday's.

I am, however, pleased that the banks moved today. They have in fact followed the transports in forming a small head-and-shoulders bottom.

Therefore, I will stick with my view that some downside would make sense this week, especially in light of today's action. Even some choppiness would do -- something to work off that overbought reading.

Read Helene's latest column here.

New Ideas

I still think we need to watch the transportation stocks. Last week, they gave a good call when the iShares DJ Transportation Average Index Fund (IYT) - Get Free Report refused to break under $127.50 and formed the right shoulder of a head-and-shoulders bottom. Now look at today's action: This was the worst of the major averages, in my view. (Well, the utilities weren't so hot either, but that's another story.) If the Trannies can hold this $131.50-ish level and reverse back up, or just mill around rather than fall back under it, then we should give the market credit. If they fall back under the support, we should start to fret about the banks following their lead!

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I have had my eye on Pfizer (PFE) - Get Free Report for a while because as far as drug stocks go, it has been a laggard. But if it can break out over $32, that would be impressive, and it would set a target in the mid-$30s. Use a close stop under $31.50.

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I was asked to follow up on LinkedIn (LNKD) , which we looked at recently when it was near $210 and I was negative on it. It seems to have fallen off everyone's radar screen. People talk about Facebook (FB:Nasdaq) and Twitter (TWTR) - Get Free Report, but they have forgotten about LNKD. The stock has a lot of resistance all the way up, but if it can manage to get through $200-ish, then it ought to make a stab at that downtrend line. The line is currently $215 but it is falling, so it will probably be nearer to $210 in a week or so.

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Today's Indicator

The 30-day moving average of the advance/decline line is overbought and has not made a higher high.

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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.

At the beginning of the year, I noted that the longer-term chart of the SPDR S&P Metals & Mining Index (XME) - Get Free Report was bullish. While the fund has done well since the lows, it has not yet made a higher high. This recent action does look as though the stock is consolidating after crossing the downtrend line. Any move up from this area ought to bring higher highs. At this point, though, you would not want to see it trade back under $40.50. It needs to catch a bid on the upside soon. If it does set itself up higher, the next target would be around $45-ish.

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I have been encouraged by the action in the homebuilders for weeks now, citing KB Home (KBH) - Get Free Report as a base. While the SPDR S&P Homebuilders Index ETF (XHB) - Get Free Report has a measured target of $36-$38, I will become concerned if it cannot get over the early January high soon. If it fails, it will look like, well, a failure, and I do not like it when stocks cannot make higher highs.

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AudioCodes (AUDC:Nasdaq) has broken out of a base and measures to $9.50. Keep in mind that these low-priced stocks tend to be much more herky-jerky in their movements than the higher-priced big-cap names. (Think of stocks like IBM (IBM) - Get Free Report that are more true to form.) For now, AUDC has done nothing wrong, so you should wait for the move up to $9.50. Another thing about low-priced stocks: If they do get moving, they often overshoot their target because the price is so low. But for now, stick with $9.50 on this one.

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