Charted Territory: Two Charts Enter, Only One Leaves

GBS shows why CNet looked better than 3Com, plus ugly duckling stocks may grow up.
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As is the occasional custom of these Wednesday columns, today I'll do a little housecleaning, a little commentary and a little chart dissection. In short, nothing too tiresome to wade through (and to write, as I try to take care of my flu-wracked body).

Item No. 1: Why

(CNET) - Get Report

CNET? Why not

(COMS)

COMS?

After my recent weekend

column, a number of folks wrote in to ask why I was bullish on CNET but bearish on COMS, when both had nearly identical charts. Hmmm, a good question, and honestly it took me a few minutes to figure out why I had arrived at that conclusion myself.

You see, my normal style is to look at a chart, and immediately arrive at a bullish or bearish conclusion. After I do that, I then flesh out a few details, and attach the chart to the column. So, the initial "diagnosis" is pretty quick, but I'd like to think it's based on years of looking at thousands (millions?) of charts. Sort of like the kindly doctor who, with years of experience, looks at you for 30 seconds, decides you have the flu and sends you off to the pharmacy. (When I'm wrong, of course, perhaps I fall into the quack category!)

In any event, here are the charts that appeared in the column.

But in answer to the bullish/bearish question, what exactly was in the charts that I intuitively felt, but couldn't or didn't verbalize?

In short, there were four things:

1) The time frames on the charts were different! Whoops, that was an obvious one and I should have pointed that out up front. COMS was a weekly chart, while CNET a daily chart. That aside, though, the rest of this discussion is still valid and should help you discern good charts from bad.

2) CNET's pullback occurred on decreasing volume; COMS' pullback did not. After a stock makes a new high, it's normal for it to pull back, but you want this pullback to occur on declining volume. In this case, CNET's pullback is perfect. COMS' volume, however, never drops off, making the pullback a bit suspect.

3) CNET never violated the prior resistance -- now support -- line. Notice on the chart below that while CNET pulls back it stays well above the breakout area. In the case of COMS, however, it dramatically breaks previous support, a fairly bearish sign.

4) COMS was ripping up the 50-day moving average. From many of my previous comments, you know I don't make trading decisions based on a stock's relationship to its 50-day MA. However, that doesn't mean I don't look at this as a source of clues. And here, the clues are huge: Not only has COMS broken below the 50-day MA, but the 50-day MA is trending down. This is in direct contrast to CNET's 50-day MA, which is trending up. And not only is that MA moving up, CNET never comes close to broaching it. So, overall, bearish for COMS, bullish for CNET.

Hopefully this dissection cleared up a few things and gave you a peek inside my "inner workings." Normally not much is going on up there, but every once in a while even I stumble across something interesting!

Item No. 2: What will give, overbought or oversold? As pointed out by a number of fine commentators I rely on (most notably

Robert Drach

, and also

Drew Robertson

, who does the excellent

Atlantic Broadcasting Systems

daily update), there is a growing disparity between the haves and the have-nots. In essence, the largest, most glamorous stocks (i.e. the

AOLs

of the world) continue to grow and prosper, while the ugly ducklings (pick the small-cap of your choice) continue to, well, suck wind. This is clear in a quick look at the difference between the advance/decline line and an average like the

Nasdaq

, which recently made a new high.

So clearly something has to give. Either we all crowd into the blessed top 200 stocks -- causing their eventual blowoff and collapse -- or some of us start to migrate into the beaten-down dreck, causing them to at least look respectable vs. the big guys.

And, as bearish as I can be, maybe, just maybe, it's the latter. In fact, I was discounting this avenue, until it was pointed out to me last night in the daily

Worden Report

(another excellent commentary and part of the

TC/2000

package) that the

Russell 2000

appears to be making a breakout of its own.

Sure enough, the chart does look pretty good, so maybe the doomsdayers will have to hold off on the collapse of the market for a while. Personally, I'll be flabbergasted if things work out to the bullish side. On the other hand, if that's what the market wants to do, then that's the direction I trade. I have plenty of personal feelings about this market, but in the end I'm loyal to only one thing: my bottom line.

And speaking of my bottom line, my true bottom line is my health. Back to bed for me now!

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication he had no positions in the stocks mentioned, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. This column, Charted Territory, appears every Wednesday. Smith also writes Technician's Take, which appears every Monday, and TSC Technical Forum, which runs Saturdays and Sundays. While he cannot provide investment advice or recommendations, he welcomes your feedback at

gbsmith@ibm.net.