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When Charts Speak, Traders Listen

This column was originally published on RealMoney on Sept. 9 at 9:00 a.m. EDT. It's being republished as a bonus for readers.

Sometimes when I post my daily charts I find myself amazed at some of the action in the chart because the news would imply a far different reaction. It's not that a particular stock is bullish or bearish, it's that you notice certain things about it.

For example, Thursday I discussed everyone's newfound love for the drugs . I first noticed back in July when Amgen (AMGN) reported those great earnings that it was almost unanimous big pharma was dead and biotech was the way to play pharmaceuticals.

But the big pharma stocks were all so close to support at the time. They continued to edge down eighth by eighth, but not for much longer. It was like all the selling had been done before these folks made their pronouncements and there was no one left to sell.

Then came the Merck (MRK) news. It was Friday, Aug. 19, and Merck dropped that afternoon to about $28. By Monday everyone and anyone was commenting that Merck was ruined. But I noticed that Merck made its low that Monday at $27, which happened to be a higher low than it made last November when all of this started to come to light.

This is not an endorsement of Merck, nor did I feel buying Merck down there was more than a quick trade. (I much prefer bases and there was obviously no base in the chart.) But it is the sort of thing that I take notice of and it is the type of situation I look for that typically becomes the first step in the process of making a bottom. In this case, we had everyone scoffing at the drug stocks, and then came the news that Merck had lost its Vioxx lawsuit.

(For those who are watching Merck, I will note that it has a lot of resistance as we approach $30, from previous trading as well as a downtrend line, so I expect it will need to come back down and revisit the lows of a few weeks ago)

Away from the drugs, I noticed Thursday night that Nordstrom (JWN) had come down in early August when the retailers all started falling apart. And then came Katrina and high gas prices and everyone discussing the slowing of the consumer. Yet look at Nordstorm: It has climbed right back to the old highs!

Then there's the homebuilders: Pulte (PHM), or Toll Brothers (TOL), or how about Hovanian (HOV), the one that actually had the bad news? These are all ugly charts, and all appear to be in the process of building tops. But shouldn't we ask ourselves why it is that when the bad news came yesterday they didn't make lower lows than they did a week or so ago?

Then there's Google (GOOG). It's become an ordinary stock. Two days ago it was up 6 bucks on the session, almost back at $300 and no one bothered to make a fuss. A few months ago CNBC would have set up a bug especially for Google, but now the stock is up 6 and everyone just shrugs.

Perhaps this is just a long way of saying to remember that it's not the news but how the stock reacts to the news that matters most.

For the market as a whole, we are now in an overbought position, and sometime between now and Tuesday we ought to be maximum overbought for this move. To me that suggests next week ought to find the market struggle and more than likely give back some of these recent gains.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

P.S. from Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.

Helene Meisler writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.

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