Technical Difficulties: Technical Analysts Use Different Barometers, Find Different Results

It didn't become clear until much later that 5048.62 on March 10 was the top -- at least for the Nasdaq Composite -- or that 1527.46 on March 24 would be the peak for the S&P 500. Does it really make sense for anyone to search for the bottom now?

If you're a technical analyst, it's job No. 1 these days.

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Technical analysts -- those market watchers who sift through market charts and historical data to seek trends and make predictions -- have been trying to gauge precisely where the bottom is and when we'll see it. Trouble is, everybody is pointing to different data -- and coming up with different answers.

As far as the indicators go, "enough's enough," says Gregory Nie, chief technical analyst at First Union Securities. "The market's overdue for a bounce."

Ralph Acampora, the chief technical analyst at Prudential Securities, believes that the bottom is not clearly in sight. He notes that investors "want it to be, but I don't know if I agree with the assessment [that the market is due for an upswing]," he said.

While the debate among these folks can get, well, technical, it's illustrative to know how to read these market tea leaves and how different data yield divergent conclusions.

Overbought/Oversold Indicators

"The one indicator I would point to is how oversold the market is," said Nie. "We've been moving to the downside, and history suggests that we've moved far enough."

In a market comment Monday, Bob Dickey at Dain Rauscher echoed Nie's sentiments. "The timing of the current near-term low, and the oversold condition that the market is in, fit this same pattern [indicating the start of advancing market trends]."

Overbought/oversold indicators are a measure of momentum, regardless of the price or level of the markets. This indicator measures several determinants to say that the market has reached a point where selling or buying has gone past where it should. Common indicators include moving averages based upon the daily numbers of gainers and losers in the major market indices.

The most common uses a multiday moving average of the difference between advancing and declining issues on a daily basis. When the market is in oversold territory, and the magnitude of the oscillator -- the fluctuating measure of overbought vs. oversold -- shifts upward, this can signal a plateau, or a short-term low, from where the market will go up, and vice-versa. Helene Meisler's Primer provides a more detailed explanation.

"The [overbought/oversold] indicator I would look at," says Nie, "is the Arms Index, which simply measures up-stocks and their volume against down-stocks and their volume." The index, a ratio, indicates buying pressure when below 1, and selling pressure if above 1. Currently, he says, the NYSE records a 0.3 level and the over-the-counter markets show a 0.7 level. "That indicates buying pressure."

Advancers and Decliners

Acampora hunts for signs of a bottom in a different part of the market landscape and comes up with a different answer.

The only indicator Acampora claims to be watching at the moment is the NYSE advance/decline line. "It's giving you the direction of the majority of stocks on the NYSE," he said, adding, "the NYSE bottomed when the Nasdaq peaked."

Separating the decline in the tech-heavy Nasdaq from overall market is key to Acampora's current assessment. He thinks that market "breadth has been improving dramatically." The cumulative advance/decline line -- the number of stocks that gained on the day minus the number that fell on the day -- is often referred to as market breadth.

Highs and Lows

A third closely watched indicator follows the weekly highs and lows of the major market parameters -- the Dow Jones Industrial Average , the S&P 500 and the Nasdaq Composite . Taking the numbers as a trend line -- that is, following the progression over the years -- indicates that the current market lows are nearing a position for recovery, according to some techies.

The trendlines show that over the past few years, the lows hit by the indices have been progressively higher, as have the highs. Plotting trendlines through these lows, it becomes apparent that the low levels being pushed by the market currently are approaching those low levels of previous years. Should the trends continue, as technicians expect, than the lows set this year should be above those of the past years.

This being the case, the market should pull back into an upswing before crossing last year's low levels.

"You hit a low in 1994, a higher low the next year, a higher low," and so on, said Nie. "So we're above the trendline now," he said, which puts the markets in position for "a bullish move."

Short Interest

Short interest is another commonly tracked market indicator. Short interest is the amount of short positions that investors are holding. Investor who are short sell stock they borrow at the current price in hopes of replacing it with stock bought more cheaply in the future. Shorting stocks is a gamble that the price of the stock will fall -- investors aim to make a profit on the higher price at which they sold the borrowed stock.

The amount of short interest in total, then, is an indicator of investor sentiment. The higher the amount of short interest, the more investors are gambling that the markets will decline. At the extremes, short interest is a contrarian indicator: When so many people turn bearish on stocks, it suggests a bottom may be near.

Short interest levels peaked back in December, and have been declining slowly since. Generally speaking, this means that fewer investors believe the market will continue to fall.

As for the final bottom, are we there? "The recent low is also a tough call as a final bottom, as it lacked either the climactic action or the basing time that has been characteristic of major bottoms for years," Dickey wrote in his report. "The recent low, therefore, will likely be tested again over the next few months."

But the bottom and turning point "can happen at anytime," Nie said. "We recommend being in position before that upswing occurs."