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Hello I2p and welcome to PSG.

In step 5, you highlight/select the layer with the anime girl (layer 1). Then you hold the Command/Control key and use your mouse to mouse click the thumbnail of the layer with the ellipses, or what they describe as layer C. This makes a selection (marching ants) of the ellipses.

In step 6, you feather the selection you just made following the tutorials instruction.

In step 7, make sure your layer 1 is still highlighted/selected and then hit Command/Control + J. This will make a new layer (layer 2) that will have the ellipses with the girl inside them.

In step 8, highlight/select the newly made layer (layer 2) and enter the liquify function as directed by the tutorial.

In step 9, select the bloat tool from the tools located on the liquify's tool bar. Make the size of your bloat tool just a bit larger than the width of the individual ellipses and bloat around each one of them. Hit OK when done. (not sure on this one as the tutorial is rather vague on how to do this.)

Hope that helps.