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Oversold Markets Pave Way for Rebound

But sentiment is key to figuring out how strong any bounce back may be, writes Helene Meisler.

U.S. stock markets were oversold earlier this month despite small-cap stocks bouncing back.

But those dips in the market weren't likely to continue, Helene Meisler noted in a recent Top Stocks column.

One key for that view is that the number of stocks reaching new lows peaked on Aug. 17 at 340 on the Nasdaq while the NYSE was 118 on Aug. 19, Meisler noted. Tracking stocks reaching new lows can help show when selling pressures are easing during market declines. They can also help in forecasting how much rebound there's likely to be since depending on how intense the bearishness gets.

Several sectors have been holding their own, Meisler noted, including banks, energy and transportation. All of them should be watched closely.

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In particular, investors should closely follow the U.S. Global Jets ETF  (JETS) - Get US Global Jets ETF Report, a long play on airline names. “For now it is holding at $21, which means it has not made a lower low versus July,” Meisler wrote. “A break here under $21 is not bullish. Then I’d look for $18-$19 to fill that gap below. If it holds, it would be another sign some of this bad news in the travel names is priced in.”

Elsewhere, tech stocks, including the mega cap ones, “have been churning around for weeks,” she wrote. “To me, they have become hidey holes, and I don’t think we can have one of those long lasting - multi week/month - rallies until these stocks get sold, or at least we see some panic in them.”

Cheer up, though. September and October are historically volatile months in the markets.

Read more from Top Stocks, where Meisler puts technical analysis to work for you, finding the stocks that outperform the indices and anticipating the potentially big winners.