Market Action Speaks Louder Than Market News

Helene Meisler admits she was wrong to let the Compaq earnings news persuade her to downplay the importance of the market's technical action.
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After arriving home from vacation this past weekend, I posted my stock charts, updated my statistics and was duly impressed. I kept muttering to myself how much better things had gotten in the week I'd been gone. I figured the market was set to rally further.

Let's face it, I had been complaining about the meager number of stocks at new highs. I even wrote before I left that one of the reasons to turn more bullish on the market would be a reading in that indicator higher than the 82 we saw in mid-March, but I didn't think it possible. Well, after the action last Thursday and Friday, I could not complain any longer: Two days in a row we had readings in the 90s, handily beating that peak reading of 82.

And then there was the advance/decline line. Back-to-back positive readings were certainly something to write home about. Sure, we were still well off the March highs, but this was the best A/D reading in quite some time.

We were overbought, but only moderately so. It appeared we had finally gotten this market in gear on the upside.

Technically, things were in good shape. I was set to write bullish comments in my Daily Chartist update. Then I made an unforgivable mistake for a technician: I paid attention to the fundamentals. I saw the

Compaq

(CPQ)

news and panicked. My rational brain said there was no way the market could shrug off this negative news. Oh sure, the market had shrugged off the

Caterpillar

(CAT) - Get Report

news and the

Coke

(KO) - Get Report

news, too. Even

Gillette's

(G) - Get Report

negative announcement had little effect. But I was certain there was no way to ignore a negative announcement from a technology stock. After all, tech is, well, tech.

So I took another look at those great statistics. And, lo and behold, we were moderately overbought. Typically not enough to make a big deal over, but with the Compaq news, I figured it meant something more. I was clearly wrong. The market had finally shown some underlying strength, and I let the fundamental news guide me instead of the technical action. Just plain dumb.

The negative news from Compaq did nothing more than provide a buying opportunity in the market. It is standard for the advance/decline line to lag on such a day, but yesterday's A/D action should be highlighted. The big down opening showed a net negative of approximately 800 in the A/D line. When the market reverses like it did, we would expect the line to slowly get better as the day marched on, but rarely does it turn positive on such a day. Monday's positive (353) reading gave this market something it hasn't seen in over three months: three consecutive days of positive advance/decline readings! Not since the final days of 1998 leading into 1999 have we seen a string of positive readings like that.

In addition to that bullish sign, the number of stocks at new highs expanded once again -- also not typical for a reversal day. And that moderate overbought reading did something it hasn't done in quite some time: It got more overbought. In fact, the overbought/oversold oscillator will not reach a maximum overbought reading until the middle of next week.

This will be the true test for the market now. There has been much underlying improvement in the broad market, which is healthy. However, for this market to keep going up in good heath, we need it to show healthy comparisons to the mid-March highs. It passed the first test by making more new highs than it did in March (of course, the next test for that indicator is to beat the 154 new highs on Jan. 6). Now, it must also show us a higher overbought reading than the mid-March reading, giving us an indication of upside momentum.

We would also require the cumulative advance/decline reading to surpass its March highs. Currently, that's about 2,000 points away. Not an easy task, but I won't prejudge it.

With the cyclical stocks on fire yesterday, there seem to be more bases emerging from the individual stock charts.

Alcoa

(AA) - Get Report

still has one of the best charts in that group. So does

AlliedSignal

(ALD)

in the

DJIA

.

Procter & Gamble

(PG) - Get Report

is also one of the better Dow charts. In the financials,

Citigroup

(C) - Get Report

is digesting its gains at its old highs from last summer. This stock is buyable into any correction or sideways action, as a move to new highs will likely ensue.

Elsewhere,

American Home Products

(AHP)

,

Abbott Labs

(ABT) - Get Report

and

Schering-Plough

(SGP)

are good charts in the drug group. Even

Bristol-Myers

(BMY) - Get Report

hasn't backed off very much this time. Other consumer stocks include

Pepsi

(PEP) - Get Report

, which continues to build a decent base, and

Anheuser-Busch

(BUD) - Get Report

.

Nucor's

(NUE) - Get Report

chart is also a big base in the cyclical area.

On the negative side,

Eastman Kodak

(EK)

has not shown much participation despite telling us things are getting better. And

Toys R Us

(TOY)

halted at resistance once again.

With my technician's hat firmly planted on my head, I will concede that all is not perfect in this market environment, but much is improved. It is the underlying improvement that I will focus on at this point.

Intel

(INTC) - Get Report

and

IBM

(IBM) - Get Report

may report earnings or revenue shortfalls this week, but as long as the market's statistics continue to rise and show underlying improvement, I will pay more attention to the action of the stocks rather than their news. That's technical analysis.

Author's note: I will be traveling for the remainder of the week. My next full column will run on April 20, but my Daily Chartist update will be appearing the day before, on April 19.

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 the stocks 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.