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Can We Open Our Eyes Yet?

The Chartist says things are looking up, but there is a lot of base building ahead.

April 19, 2000

OK, so I spent my entire vacation worrying about the stock market. Not exactly what I'd hoped for, but the market is rarely accommodating, is it?

Let's begin with what we already know: There was a lot of damage done during these past two weeks, especially in the New Economy technology names. And damage such as we've seen does not reverse itself overnight. We may have hit a major oversold reading, one that I've never seen before that made a bounce inevitable, but it is ridiculous to expect an outright one-day reversal of the 35% drop.

The best way to understand what we've got in store is to have a look at the Old Economy

NYSE

stocks first. By now, it seems like ancient history, but remember the slide in these stocks that began in January? It wasn't as sharp or as swift as this recent

Nasdaq

slide, but it doesn't change the fact that it was painful for the owners of these stocks, much in the same way technology holders felt huge pain in April.

For nearly two months it seemed these Old Economy NYSE stocks couldn't catch a bid. The NYSE made its low in early March and then for about a month these stocks enjoyed a rally. But that rally ran into resistance and eventually caused another slide, which, in many ways, improved lots of the charts and statistics on the NYSE. They needed to back off from resistance in order to make for better bases, which are the clue to this entire puzzle. Since these stocks only bottomed a month ago, it's too early to see bases of any significance. It usually takes several tries to eat through resistance, but at least the process has begun on the NYSE.

One of the examples of the improvement on the NYSE during last week's whack can be found in the

NYSE Unweighted Average

. The NYUA is the average percentage move for all stocks derived from

QCHA

as found in

Barron's

each week. You can see how the

S&P 500

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came so close to its late-February low last Friday, while the NYUA held high above its late February low. Many of these Old Economy stocks did not participate in last week's slide to the same extent that the averages did.

In addition to the NYUA, the oscillator did not come close to reaching the oversold level we saw at the lows in late February -- another positive. And, of course, the number of stocks making new lows never even came close to the February numbers. These are all signs of the continued improvement we're seeing in these stocks. But the bases still require building, and only time and backing-and-filling can do that.

So, what does all this have to do with the

Nasdaq

? Well, if the Nasdaq's slide is over (and it has yet to provide us with the positive divergences that prove it is) then it is currently about a month or so

behind

the NYSE in the bottoming process. Repairs still need to be made, resistance still needs to be eaten through, and the backing-and-filling is still ahead.

This does not necessarily mean the Nasdaq must come down and retest the lows we saw on Friday, April 14. It would be nice if we got a successful test of the lows, but there seems to be a consensus that we must retest. (Since when was the market this accommodating?) I won't rule out a retest, but at this point we've reached such an extraordinary oversold condition -- and we have rallied so sharply from it, both in price and momentum -- any retest probably won't happen for several weeks.

You may recall how the rally in late March and early April was barely visible on the oscillator chart. That time, though, the rally is quite obvious, which I believe makes this oversold reading rather significant. In fact, some backing-and-filling over the next few days would not have much effect on the oscillator, except to give the rally more fuel. Some backing-and-filling, along with some positive statistics, might even help the other indicators show improvement.

So, is it safe to close our eyes and buy these stocks again? No, because from here on out the market will get choosier and choosier about the stocks it favors.

The biggest problem we have right now with the Nasdaq is the damage that's been done in individual stock charts. We had similar damage in many of the B2C stocks last spring and a majority of those stocks never came back --

E*Trade

(EGRP)

and

Ameritrade

(AMTD) - Get TD Ameritrade Holding Corporation Report

are two that come to mind). I do not believe it will be different this time around. For this reason, there may be some spectacular bounces in some the B2B and biotech stocks, but many of them will turn out to be retracements that will ultimately lead these stocks lower.

As this oversold rally progresses, it is important to watch the volume in individual stocks. If the rallies come on lighter volume (as I saw many did on Tuesday) then it is best to steer clear of these names. When we reach an overbought reading, they will be the first to fail. There is no need to speculate when the market still has base building to do.

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.