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Watch Out for Falling Objects

Even if we bounce – and we should – I still don’t think the correction is over.

The Market

Well I did not expect a total collapse. I expected a crappy rally, then back down again. But the market had a different idea.

Let me share with you a few extremes we saw Monday. But I want to first reiterate that even if we bounce – and we should – I still don’t think the correction is over. It takes time for the intermediate-term indicators to get oversold. It takes time for all the sentiment measures to go from the recent “too bullish” to “too bearish.”

And there are some other issues, such as that the number of stocks making new lows continues to expand not contract.

So what is it that leads me to see a few extremes today? For starters, breadth was so bad that the McClellan Summation Index now needs a net differential of plus 4,400 advancers minus decliners to halt the decline in the indicator. That’s oversold.

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The Nasdaq Momentum Indicator, which I explained in Sunday’s letter would get oversold on Thursday, still lines up that way. As a reminder, it need not be the exact day or date, but it tells us it’s a lot closer than it was. You can see that when I walk Nasdaq down 200 more points the Momentum Indicator goes up starting Thursday. That’s the definition of oversold.

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There was 90% of the volume on the downside on the New York Stock Exchange today. That’s a little panicky. And heck, anecdotally, I might as well throw in that CNBC essentially went commercial free most of the day and then decided to have a “Markets in Turmoil” special tonight.

But statistically speaking, the put/call ratio jumped to 124%, the highest since May 31. The put/call ratio for exchange-traded funds got to over 200% for the first time since May 31, as well. As a reminder, the 10-day moving average of the put/call ratio is nowhere near “overdone,” so this is a one-day reading we’re talking about.

So, where can the S&P 500 rally to? I’d say the underside of that broken line is the best I think it can do. I still think the sequence is up then back down.

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I am going to finish by telling you that the Daily Sentiment Index for the Bonds is now at 98. Gold is at 95. The safe haven trade is getting a bit stretched in the very short term. The S&P’s DSI is still only 35, but remember it kissed 90 not too long ago. It takes time.

New Ideas

I am coming back to the chart of Utilities SPDR (XLU) - Get Free Report, because despite the bond move Monday, the utilities were down, and if they break this $58 level, it will be a change for them since they have held on for dear life for two months now.

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Today’s Indicator

The 30-day moving average of the advance/decline line is not yet oversold. As best I can tell it is still at least a few weeks away.

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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.

We looked at MercadoLibre (MELI:Nasdaq) a few weeks ago and I said then it had hit the upside target. I still feel that way. The best thing I can say is that around $550 it probably gets a little oversold. It has earnings soon, so if it gaps under $500 it will leave this whole area since May as an island. But I am not a fan of the chart.

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When we looked at AT&T (T) - Get Free Report about a week and I said the chart needed some time to chop or pullback and that’s what it is doing now. I would love to see it back in that $32 area, because I would buy it there.

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Verizon VX would probably be a buy between $53-$54, because of the late May low and that uptrend line. But aside from that, I don’t see much else to like about the chart. I suppose we could praise it for not making a lower low yet.

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