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No Pain, No Gain

It looks like we're in the process of getting whacked. Here's what that means for the market.

The Market

Finally, we’re getting a whack. Notice the word I used was getting not got. In other words, I think we’re in the process.

I began the week noting that if we could get a good whack in the market, I thought sentiment would get bearish in a hurry. It is getting there. The put/call ratio today was only .92, but recall, we’re starting from a higher base since it didn’t get that low in this latest rally. I suspect if we are down again either Thursday or Friday, we’ll see it get up into the triple digits zone.

Then there is the Investors Intelligence survey. The bulls are back to 51%, which is the lowest reading we’ve seen since May. Prior to that it was near the March lows and prior to that was September/October. That’s a big start in the right direction.

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Then there are the bears. Look how many months the bears were down and this week they pushed up to 18%, the highest since they were a smidge over 20% this spring when folks got a bit concerned after the February/March decline. Again, that’s a big step in the sentiment puzzle.

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Tomorrow we’ll get a read from the American Association of Individual Investors, which I expect will show an increase in bearishness. Recall last week the four week moving average of bears was already on the rise, so I figure this week it will be another increase. And we’ll get the National Association of Active Investment Managers Exposure, which was at 97 last week. I have no idea where they will come in; I expect it might take a couple of weeks for that to change.

Let me report that for the first time in weeks, the New York Stock Exchange and Nasdaq did not see an uptick in stocks making new lows. Both saw a contraction. Will it continue until we get oversold? That’s what we’ll watch for.

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And when might we get short-term oversold? Well using the "what if" for the McClellan Summation Index it now needs a net differential of positive 2,900 to halt the decline. A reading of positive 2,000 means we’re a little bit oversold and positive 4,000 is an extreme oversold. My own Oscillator will be oversold next week.

In sum, I know today felt terrible, but it’s what we need to get a reset in this market.

New Ideas

Energy Select Sector SPDR (XLE) - Get Free Report broke down today under $48. There is support next at $46 and it is obviously getting oversold but if a rally fails at $48 then I would have to think the chances of breaking $46 on the next leg down go up.

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I would point out that for now the banks did not see much selling today nor did many of the down and out industrials. Let’s see if that can continue.

Today’s Indicator

The Volume Indicator is at 47% so it leans toward oversold, but that’s the best I can say.

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Q&A/Reader’s Feedback

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.

The iShares China Large-Cap exchange-traded fund (FXI) - Get Free Report still has a potential island bottom from late July, but there is also an unfulfilled downside target from that head- and-shoulders top that measures around $36. It’s possible $38 is enough, but in this market I would prefer to at least see signs of it holding and building a base before having any confidence that the lows will be in the upper $30s.

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With my thoughts that the transports should do better over the next few months I was asked about Union Pacific (UNP) - Get Free Report. CSX (CSX) - Get Free Report has been my railroad play there, but I suppose if UNP can crack up over $230, then it would then measure to around $240 to $245.

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C3Ai Inc. (AI) - Get Free Report has been such a disappointment, as I thought it was making a head-and- shoulders bottom back in June and I was so wrong. Now it looks to me like a move to $50 would be resistance that should get sold. If I am wrong, then it will recapture $30 easily and then I would have another look at it.

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