Oct. 22, 1999
It's times like these when the market tries your patience. For the most part, we've been in a downtrend for several months now, and in recent weeks, we've been bouncing along the bottom end of that range. This is the part that is most difficult: Is this just a way station before heading lower or is the market trying to find a level it likes from which to launch a real rally?
For this to be a real bottom from which to launch a great rally, we should be seeing more bases in the individual stock charts. Instead, most of what we see now is bottom-fishing. It's like the money is burning a hole in investors' pockets, so they look for what's come down hard that might just have an oversold bounce and they buy it. But they don't seem to want to stay on board very long: As soon as the stock has a few good days on the upside, they're off to find another down-and-out stock.
Witness the action in the airlines a few weeks back. The price of oil faltered and the stocks had been down, so they took off. A few days and several points later, some brokerage firms jumped on the bullish bandwagon, only to catch the highs of that move. Now most of the airlines are right back where they started from, and the
Dow Jones Transportation Average
has once again broken to new lows.
The retailers have also seen similar action:
is the most obvious one of the bunch. It came down to 30-ish, had a huge rally to the upper 30s, only to come back down and make a marginal new low. Now it's trying to resume its climb. In the drug sector,
had the same type of action. It made a low at 41, rallied all the way to 50, giving us that warm and fuzzy feeling that all was OK now, only to come back down to 42 1/2. And now it is rallying once again. This is the market's way of shaking out the weak holders and finding strong buyers, and that takes time and patience. This week, we've seen the initial low and bottom-fishing in the banks; it's likely once they reach resistance, it will be their turn to test the lows again.
Of course, the main reason this action tries our patience is because we don't know if these trips back down will hold or break. The real answer is that, as always, some will break and some will hold. However, if this is going to develop into a really good bottom, then we must endure this action for quite some time. This backing and filling, or up and down, is how bases form. And without bases, rallies will be short-lived.
In an effort to show you how a truly great rally develops from a well-developed base, I have picked two technology charts as examples:
. Look at both and see how it took almost all of 1998 to form the bases from which they launched great, sustainable rallies. For the better part of a year, these stocks went up and came right back down, backing and filling and frustrating investors and traders alike. But see how once they broke out of those bases they were off to the races and never looked back?
Would I buy either of these two charts now? No. I like bases and I believe these stocks are so far into their runs that it is much too late to buy 'em. (And Texas Instruments is beginning to struggle up here.)
So I have gone through the chart book and once again must report that I am hard-pressed to find bases that look like those we saw a year ago. There's still
, and I can offer up
as an example of a stock building a base. Oh sure, Kellogg is up against plenty of resistance now (beginning at 42), which tells me there's likely more backing and filling to be done before it can push ahead in a meaningful way. However, it's more than one year into its base-building, which puts it way ahead of most stocks.
Now, in terms of the market as a whole, we saw a bit of panic on the opening yesterday morning.
was much more breathless about the downside with yesterday's
news than she was with
over the past week. And stocks opened on gaps down, which generally means sellers were anxious to sell. Couple this with the oversold condition that still exists in the market and it says there are still more rally attempts out there over the next week or so.
Toward the end of next week, earnings reports will tail off, bringing with it the next market focus: the November
meeting. In addition to Fed-watching, I continue to believe Y2K will keep the market choppy around until year-end. And this will try our patience.
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 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