Midday Muse: Change Remains the Only Constant

The market's consistent inconsistency re-emerged this morning as stocks once again reversed the prior day's trend.

Woefully unable to build on yesterday's rally, the

Dow Jones Industrial Average

was recently off 1.42%, the

S&P 500

was down 1.79%, and the

Nasdaq Composite

was off 1.5%.

Reports that

IBM

(IBM) - Get Report

is being investigated by the

Securities and Exchange Commission

, according to

SEC Insight

, and investors refusal/inability to get excited about earnings at

General Electric

(GE) - Get Report

and

Yahoo!

(YHOO)

certainly contributed to the midday declines. So too did weakness in financial names such as

Merrill Lynch

(MER)

, which was granted a stay until April 19 on a court order to dramatically increase disclosure of investment banking relationships in its analysts' reports.

Major averages also suffered from traders' growing skittishness, which is causing them to more quickly book profits, such as those generated in yesterday's rally. Furthermore, that market's inability to sustain a rally is generating disillusionment among even some of its recent staunch defenders.

"If buying interest for the Nasdaq fails to emerge now -- and the Nasdaq reverses again -- it will be vulnerable to a nasty breakdown," Michael Paulenoff, president of 2Mstrategies.com, commented this morning. Specifically, the index could suffer "another down-leg" if it can't hurdle its most recent rally peak of 1796 on Tuesday morning, he said.

Conversely, the Dow's technical action this week "leaves little doubt" that it has ended the correction from the March highs, and should retest the 10,666 area, he said. The Dow may even break out and visit Paulenoff's "optimal upside target" of around 10,900.

A technician being more bullish about the Dow vs. the Comp these days is hardly unique. Don Hays of Hays Advisory Group yesterday noted that the Dow industrials and transports have "refused to cave"; he called this "a very good sign" and forecast they will rally amid a "torrent of better-than-expected first-quarter earnings."

Hays dubbed the beleaguered Comp "not a fair representation of what is going on," noting strength under the surface as evident by the outperformance of stocks at new 52-week highs vs. new lows. Midday today, new highs were besting new lows 229 to 49 in Big Board trading and by 185 to 60 in over-the-counter activity. Still, that doesn't alter Hays'

recent prediction that the Comp would hit 2250 by May 1, or help those who've been betting on it.

Still, Paulenoff's cautious call this morning struck me as noteworthy because he has been consistently bullish, at least short-term, since our initial encounter in

late February.

At that time, the technician believed the "corrective process" that followed the December-January highs was ending. Days later he suggested that the Comp's ability to rally from support at 1730 and the S&P's technical breakout at 1094 indicated that the end of that process had occurred.

Since that time, Paulenoff has seemingly

accentuated the positive -- at least on a short-term basis -- at every turn.

Until today, that is.

If the Comp were to fall below 1697 -- roughly its Feb. 22 intraday low -- that would "invalidate my earlier forecast" for a conclusion to the corrective process that followed the September-January rally, Paulenoff said.

Of course, this waffling raises the question over whether the technician risks shedding the bullish posture at precisely the wrong moment.

Regarding traders who are "so nervous and scared about being long they take 20 or 30 cents on any up-move and have little or no tolerance for weakness," Paulenoff said, "In the past, this condition usually indicates that a substantial rally is approaching."

As for his own jitters, the technician said, "Unless or until the

Nasdaq's February lows are violated, my work says I need to remain in 'pullback buy mode,' and that I should disregard my emotions, which whisper constantly now that the market feels terrible, and that a plunge could emerge at any moment."

Putting those emotions aside, Paulenoff reiterated that his coldhearted analysis still suggests a "potent rally" could be forthcoming.

So in the end, that's far from the kind of capitulation contrarians say might indicate a sustainable advance is coming. But it is a step in that direction.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.