Bulls Rush Out

The Chartist says the recent bearish sentiment is what we need to put in a decent bottom.
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Two weeks ago, the market was in full swing to the upside. Oh sure, there were lots of red flags -- like all the profit-taking into the great earnings reports -- but all in all, there were plenty of bulls around.

Guest after guest on

CNBC

and

CNN's

"Moneyline" were bullish. Some of the comments I jotted down from various market gurus included, "The economy is great," and "Second-quarter earnings will be better than expected, so I will have to raise my earnings estimate for the

S&P

." There were plenty of reasons to be bullish. But that's the way it always is at the highs.

Let's face it, if the news were bad, would stocks be stretching to the sky? No way -- they'd be falling like a ton of bricks. The news at the top is always good.

Jim Cramer

told us that if the market were going to push higher, we would need more bears. And he was right. But we never saw the bears -- they stayed in hibernation. And the more the bulls talked up the market, the more toppy it got.

However, in the past few days, something has changed. The guests on these shows are mostly bears. Now we hear comments such as "I'm cautious in here" from many of the guests. That is the sort of sentiment Jim Cramer wanted to hear two weeks ago. Only it's taken an 8% dive in the

Nasdaq

to bring those folks out. That's the kind of sentiment we need in order to get a decent bottom, so this is a step in the right direction.

We are currently moderately oversold and might see a bounce shortly. However, a bounce at this point would more than likely be just an oversold rally and nothing more. I have never been a fan of buying stocks simply because we're oversold. Oversold just means we should begin to lose downside momentum. It is the trending indicators that matter at this juncture.

Currently these indicators have rolled over and are still heading down. We cannot get a bottom worth buying until these indicators have halted their slides, flattened out and reversed course. And that takes time.

The number of stocks making new 52-week lows has been expanding throughout this correction. Until that number begins to contract, the message we're getting from the individual stocks is that the pressure is still on the downside.

And it doesn't take a rocket scientist to see that the market's breadth has been awful lately. Even the Nasdaq, with its spectacular rise in early July, saw its best one-day reading in the advance/decline line during that time post a net positive of 989 issues. Yesterday's reading? Negative 1,449. That tells us the rise was narrow and the decline is broad. That does not add up to a decent bottom right here.

For a decent bottom, we need positive divergences. For example, fewer stocks making new lows would be a good start. Or even if the a/d line acted better than the big three averages on a down day. So with the market oversold, it's possible we could get a bounce, followed by another slide which produces positive divergences and thus a better bottom. But at this current point in time, that involves a lot of guesswork. So without statistical evidence of a turn, I continue to be suspicious of rallies.

As for individual stocks, did you notice that as soon as I gave up on the financials' outperformance, they all rallied big yesterday? I think sometimes the market does that just to make me feel like a fool! In any event, many of these stocks have bounced off uptrend lines dating back to their October lows. This is an important point. It establishes support levels that, if broken, would signal a change in the longer-term trend.

Chase Manhattan's

(CMB)

line is just under 80.

American International Group

(AIG) - Get Report

has a similar level around 116.

Bank of America

(BAC) - Get Report

has shown its number to be 68.

American Express

(AXP) - Get Report

does not have a specific number I can find, but it continues to act like a good chart.

And if the financials can back and fill (and frustrate me!), then maybe

AMR

(AMR)

really is OK in here, too. It doesn't seem to want to go down.

I continue to think

Gannett

(GCI) - Get Report

is a good chart. And

Kellogg

(K) - Get Report

feels as though it's searching for a bottom in here, although it's likely very early in its search.

On the negative side, I think the worst charts I post are in the oil-service sector.

Baker Hughes

(BHI)

seems to be spending an awful lot of time churning here at resistance.

Halliburton

(HAL) - Get Report

doesn't look much different. All this despite the $20 oil price.

In the

Dow

,

Eastman Kodak

(EK)

is still a negative chart.

Sears

(S) - Get Report

needs a bounce but has clearly broken.

Philip Morris

(MO) - Get Report

may be a good value down here (and it has some good support), but that does not make for a good chart.

Finally, I would like to point out the head-and-shoulders tops in two stocks:

Yahoo!

(YHOO)

and

Amazon.com

(AMZN) - Get Report

. You will need to look at the weekly charts (use a two-year time frame in the Tools section of

TSC

) on them to see it clearly, but they stand out like a sore thumb when I go through the chart book. Since I do not expect these stocks to break on this leg down (since these are weekly charts, I expect they will bounce again before breaking), it would be best to keep these negative weekly chart patterns in mind with those neckline levels as clear stops. Yahoo!'s level is 118, and Amazon's is 92.

A short-term oversold bounce is possible in here, but until the indicators show a change in trend, it's not a bounce I'd want to buy.

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and 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 at

KPMHSM@aol.com.