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'Rebound' Suffers Relapse; 'R' Word Is Uttered Anew

SAN FRANCISCO -- For one session, at least, the skepticism was clearly warranted.

Ending 3 1/2 days of upward momentum, the Dow Jones Industrial Average fell 1.6% today, while the S&P 500 lost 2.4% and the Nasdaq Composite shed 6%. Profit warnings and other bad news from -- most prominently -- Palm (PALM), Nortel Networks (NT) and Disney (DIS) served as harsh reminders of the still dicey fundamental outlook for much of corporate America.

Additionally, some market players were shaken (if not stirred) by a Reuters story late Tuesday in which Anirvan Banerji, director of research at the Economic Cycle Research Institute, said a recession is now unavoidable.

"We have passed a fork in the road and have switched to a recession track," Banerji was quoted as saying. He added that nearly all of ECRI's indicators are flashing recession warning signs and that "we don't make these calls lightly. It has been more than 11 years since we called the last recession."

Meanwhile, a report showing higher-than-expected money supply growth in the eurozone raised concerns about whether the European Central Bank will ease tomorrow. The ECB appears determined to fight any signs of inflation's re-emergence, unlike our Federal Reserve (regardless of perceptions to the contrary).

By almost every measure, money supply here is soaring, but the Fed appears willing to risk future inflation in its current effort to stem economic malaise. Past criticisms of Alan Greenspan and concerns about future inflation/stagflation notwithstanding, that's an appropriate approach, as I've said previously. I just (still) think intermeeting moves are unwarranted and will eventually cause more harm than good given the current economic data.

Springtime for Wall Street?

But we digress ( whadda you mean "we"?). In addition to most investors, today was no doubt particularly disappointing to those hoping yesterday had "confirmed" that Thursday's intraday reversal was for real.

The "confirmation" or "expansion day" theory is a technical assessment that states, essentially, if you get a session of more than 1% gains on greater-than-average volume three or four sessions after a reversal day, it legitimizes the move.

Given the Dow's 2.7% gain and New York Stock Exchange volume of 1.35 billion shares (vs. a daily average of 1.2 billion for December-February), yesterday's session appeared to at least contain the bare minimum necessary for a confirmation session.

But even William O'Neil, who has popularized the "confirmation day" theory in his writings for Investors Business Daily, where he is chairman, expressed doubts in an interview late yesterday.

There have been "positive, constructive signs," but "don't jump to conclusions everything is fine [because] so much damage has been done" previously, O'Neil said from the offices of William O'Neil & Co. in Los Angeles. "If you're building a bottom in the market, you'll have plenty of time to buy. You have to make sure it's sound" first.

John Bollinger, president of in Manhattan Beach, Calif., noted that the concept of confirmation or "expansion" days stems from the work pioneered in the 1920s by Richard D. Wyckoff, founder of the Wyckoff Stock Market Institute in Phoenix. Bollinger suggested the recent action could be part of a so-called Wyckoff spring, which occurs when a market average (or stock) falls below its trading range, makes a new "panic low" and then "springs" back into its range, as the Dow did yesterday.

Until last week, the Dow had been in a broad range of between (roughly) 9800 and its record high 11,722 for about two years. Thus, if the classic Wyckoff pattern emerged, the Dow would now rally until resistance near the midpoint of the range -- around 10,700 -- fall back to retest the bottom of the range, and "then blow right on through its old high," Bollinger said.

But the veteran technician noted the Dow's resistance currently appears around 10,400 and admitted to not being as well-versed in the dynamics of Wyckoff springs as some others are. Notably, the sources Bollinger (graciously) referred me to who do have more expertise were skeptical that a Wyckoff spring scenario is unfolding.

"I don't normally consider it a spring when [an index] drops so far below support," Fred Wynia, technical analyst at Sherwood Securities in Los Angeles, said late yesterday. "That's not to say it can't happen, but the next day or two is going to tell you if it's a spring. If it explodes upward, you can build a case [but] I'm suspect just because of the size of the selloff" that preceded.

Today, Wynia said it's a "safe assumption" that the market's reversal enhanced his cynicism. He noted the Dow's fall was "logical" based on the fact it had retraced 50% of the 1,700-point drop suffered (intraday high to low) from March 8 to March 22, and that it had come back to approximately its lows of last October.

Whether the Dow now "craters or sells off and the previous lows hold" is impossible to predict, Wynia said. But he declared the bias remains downward and continues to play the short side, focusing on the averages vs. individual names, via a variety of vehicles including the S&P Spiders and Merrill Lynch HOLDRs.

Similarly, Henry "Hank" Pruden, executive director of the Institute of Technical Analysis at Golden Gate University in San Francisco, agreed the Wyckoff spring scenario is unlikely, and, more specifically, that it's too soon to look for one.

Prior to a spring, you'd expect a selling climax, followed by a rally that stalls, which we've seen. The next step would be the Dow continuing to fall, with a key element being volume starting to diminish on the downside, he said; at 1.3 billion shares today, NYSE volume was above its recent average.

While it's premature to forecast, Pruden is "leaning toward" a scenario in which the Dow falls back below the bottom of its trading range, but which "proves to be a false breakout to the downside [and] traps the bears."

That would be a good setup for a Wyckoff spring, Pruden added, noting developments such as the recent spate of "cover stories showing gloom and doom and people articulating bearish strategies" are "typically associated with an intermediate-term bottom."

So while hope doesn't exactly "spring" eternal these days, it still lives despite another nasty session for those long.


These technical terms may seem arcane to some, but I point them out because certain segments on Wall Street are sharply focused on them. (Meanwhile, I'm curious to know what Gary B. Smith and/or Helene Meisler have to say on the subject.)

Speaking of indicators, an Investors Intelligence survey showed bulls fell to 48.9% last week vs. 51.6% previously, while bears rose to 38% from 30.9%, the highest level since November 1999.

A source at II noted that bullishness has been stubbornly high lately and just seven to eight weeks ago was above 60%, the highest since 1987.

I took some heat in the Columnist Conversation for suggesting the survey is a good contrary indicator. As with "confirmation days" and Wyckoff springs, you're (of course) free to either add the survey to the laundry list of indicators you consider relevant, or to dismiss it. Supporting the argument the survey has merit is this article by Meisler, in which she details how bullish sentiment didn't really crack until the tail end of the 1973-74 bear market.
Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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