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 TheStreet.com 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
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 - Get Report) 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 - Get Report) 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 - Get Report), or Toll Brothers (TOL - Get Report), or how about Hovanian (HOV - Get Report), 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 OscillatorsFor more explanation of these indicators, check out The Chartist's
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 TheStreet.com 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.
Check Out Our Best Services for Investors
Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts
Check Out Our Best Services for Investors
Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
Every recommendation goes through 3 layers of intense scrutinyquantitative, fundamental and technical analysisto maximize profit potential and minimize risk.
Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.