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Charting a Holding Pattern

No matter what the FOMC decides, stocks aren't likely to blast off to the upside.

May 18

As we all sit around and wait for our message from the

Federal Open Market Committee

, we are filled with thoughts that range from "Yes, they will change their bias" to "No, they won't change their bias." Which to believe, you wonder?

Many times when we are in such a 50-50 situation, we can look at the technicals of the market and see which way they fall out. We can often figure out which action has already been priced into the


new stance. However, in this situation, it seems like neither a tightening bias nor a neutral stance is priced in.

You see, if the Fed adopts a tightening bias, it's likely stocks will not approve, and they will fall, especially after yesterday afternoon's reversal.

But if the Fed does nothing, the market will remain caught in its range-bound trading pattern as bond gurus all over will tell us that the Fed will change its stance at the next meeting. That will put us in a holding pattern for some time to come.

While we may rally short term in here, I still cannot see us blasting off to the upside at this point.

On a very short-term basis, very little selling took place in the past two trading days. It seemed to be more of a lack of buying than any aggressive selling. And yesterday afternoon's rally felt more like one of short-covering than of real buying. One of the best ways to see this is the lack of volume we saw. A true reversal day should be accompanied by more than 600 million shares.

High volume cleans out sellers. And when sellers are cleaned out, it makes it much easier for stocks to advance with very little resistance overhead. In this case, it does not appear that the sellers came out in a big way. So if the Fed sits tight without changing its bias, many may see this as an opportunity to lighten up in their stock positions as the market rallies. Then they will feel positioned for the next meeting. This should keep a lid on any large upside move.

Another reason that there appeared to be very little selling Monday was the shrinking of the number of stocks at new lows. Despite the drop to lower lows by the






in the morning compared with Friday, the number of stocks at new lows decreased from Friday's 77 to Monday's 70. Once again, that's a sign of light selling pressure. If the advance/decline line had acted better yesterday and the volume had been heavier, we might consider the fewer new lows bullish, but instead I believe it is just another example of a market that has not yet cleaned out the sellers.

In addition, the advance/decline line has taken a hit over the past two days. It has lost more than 2500 points. To put that in perspective, in the rally that took place from late March through mid-April -- the one in which everyone raved about the great, expanding breadth of the market -- it took the A/D line 17 days to tack on that many points. Two days just took that away. So much for expanding breadth.

And did you notice that just as everyone had given up on technology stocks and had begun to love the cyclicals, the tech stocks were the ones to reverse on the day? That sort of action is not bullish. This scrambling from one group to another just to catch that week's hot group is not healthy for the market. If that keeps up, the excess cash will be spent without the market ever making any headway. That is short-term trading stuff, not trendmaking.

And finally, the

McClellan Summation Index

is rolling over. This indicator is based on the advance/decline line, so a poor A/D reading does not bode well for this indicator. It also shows a trend, and in doing so, it shows when a trend is nearing an end. Its turn does not always coincide with the major averages, but it is certainly a good guide to show that the general underlying direction of stocks has changed for the time being.

As for individual stocks, I could sit here and list a whole bunch of them that did not make lower lows Monday vs. Friday, but that doesn't make them buyable. It only says the selling pressure, whatever little there was, had dried up.

TheStreet Recommends

In the Dow, I am still a fan of


(KO) - Get Coca-Cola Company Report

. It is building a nice base, has so few supporters these days and hasn't given us any good news in quite some time, yet it doesn't go down. I am a buyer of this stock in the mid-60s as I believe it will break out of this trading range on the upside. Also in the DJIA is



, which I have been recommending for some time now. While it has reported better-than-expected earnings (when was the last time that happened?!), I would not chase the stock into the news. The target remains around 115.

I continue to write


(CL) - Get Colgate-Palmolive Company Report



(GCI) - Get Gannett Co., Inc. Report

down on the positive side as well.

On the negative side,

United Technologies'

(UTX) - Get United Technologies Corporation Report

break was the first crack we've seen in that stock in a very long time. It is very early, but I am now a seller of UTX into rallies as I believe it has run out of momentum.


(MCD) - Get McDonald's Corporation (MCD) Report

is still a lousy chart but desperately needs a rally to be sold into.

In conclusion, we have no idea what the Fed will do Tuesday, but we do know that many stocks were tired of going down short term and may continue to relieve themselves on the upside for a while. The same way stocks in uptrends have minor dips along the way, I believe that stocks in the midst of corrections have rallies along the way, too. Nothing moves in a straight line. Therefore, I believe there is more to go in this corrective phase.

New Highs

Overbought/Oversold Oscillator

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 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 was long Hewlett-Packard, 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