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It's All About Momentum

Helene Meisler looks into the market's latest 'V' bottom pattern.

I've never been a fan of "V" bottoms. I prefer "W" formations. That's because the "W" provides us with a test of the first low. But sometimes the market is not that accommodating.

A "V" is all about momentum. It does not develop slowly. In fact, the downside rush occurs so quickly that it makes your head spin. It is accompanied by high volume, big negative advance/decline readings and large losses in the market averages. And almost as quickly as it began, it ends. It ends because it exhausts itself.

And this market had exhausted itself on the downside by the end of trading on Tuesday, Aug. 10. We were grossly oversold, both on the


and the


. At that point, the Nasdaq had fallen about 15% in a matter of weeks, which in percentage terms is the largest correction we have seen since the October low. The

S&P 500

came all the way down to and bounced off its 200-day moving average line.

Some other momentum indicators have also halted their slides. For example, the stocks at new highs minus new lows (on a 10-day moving average) stopped declining and curled under. This typically coincides with a momentum turn in the market. In addition to that indicator, the

McClellan Summation

index, based on the advance/decline line, has now ceased its decline and is beginning to curl under. This is true for the NYSE as well as the Nasdaq. (The turns on the NYSE are much sharper and therefore more coincident than those on the Nasdaq, which is why I am showing the NYSE.)

It wasn't just the downside momentum that had abated. Did you notice how quickly the bulls pulled their horns in? Oh, it doesn't show very much in the

Investor's Intelligence

numbers (although we are down to 50% bulls as of last week, and I suspect this week's reading will be even lower), but it showed up in the

Specialist Short Ratio

. That ratio, which hit a high in April at 53%, is now down to 40% (the same reading two weeks in a row!), the lowest reading we've seen since the lows last September/October.

There are some other very encouraging signs as well. Like the very bullish advance/decline line on Tuesday. Despite the big up opening in the averages, followed by the slide to negative territory, the a/d line held strong. I can't remember the last time we saw action such as that. Chalk that up on the positive side, especially if we can see some follow-through in that area.

Another bullish sign is the positive divergence we saw on the Nasdaq market. The Aug. 5 low found that average with an intraday low of 2474 and 172 stocks at new lows. Four trading days later, on Aug. 10, the Nasdaq average slid even further, making an intraday low of 2442 despite that only 155 stocks made new lows. The NYSE did not have a similar positive divergence. (And, of course, that's one of those things that nag at me!)

So now it is our job to assess the quality of this oversold rally. While I would have preferred to see a positive divergence develop in the stocks at new lows on the NYSE, I can overlook that statistic if the number of stocks at new highs expands into this rally. So far, it's been worse than ever. The


now stands less than 100 points from a new high, and we've got 47 stocks making new highs. Heck, that's worse than July -- and you know how I harped on and on about the narrowness of that rally!

As for individual stocks, I don't see much change.



is still a good chart, but it's now caught up in its hostile bid for



, so it may languish for a while.



seems to be building a small base here in the mid 40s.

Procter & Gamble


is still a good chart in the Dow.

Outside the Dow, I find I continue to write down those cereal stocks --




General Mills


-- on the positive side.



has digested its recent gains rather well, too.

On the negative side,



is clearly a negative chart and should halt its rise at resistance in the range of 66 to 68.



doesn't seem to want to break just yet, but rallies continue to elude it.




failed miserably at resistance. The retailers have not fared well either.

Dayton Hudson


looks as though its rise will halt around the mid-60s.



failed at resistance as well.



is also failing at resistance.



, despite some bullish news and commentary, can't get out of its own way, and it looks like a break of 43 is in the cards.

In technology land, I'd take profits on

Texas Instruments


. I've noticed that stocks which are overextended when they split tend to falter and go into extended corrections.



is having a lot of trouble in this area as well. A correction is in order before it can rally well.



is a sale into the bounce. And



has now failed three times just under 40.

For now, the momentum is in place on the upside. And if the number of new highs improves, that momentum can last for some time. However, if that statistic does not improve, when this momentum runs out of steam, the market will head down again. The funny thing is that this market will reach an overbought reading by the end of trading on Tuesday, Aug. 24, just as the


meeting gets under way.


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 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