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Racing Toward Overbought in Time for the Fed

The Chartist puts a leaping Nasdaq and a lurching NYSE through their oscillator paces.

March 7, 2000

When a runner is anxious to begin a race, he often jumps the gun, rushing forward before the race even begins. Stock markets are not much different in that respect: When in a bull market, traders often don't want to wait for stocks to get oversold, and they begin rallying the market a few days early. That's what happened to the

Nasdaq

in this recent oversold reading we had.

The actual oversold reading came on Feb. 25, but Nasdaq buyers couldn't wait. The Nasdaq charged out of the box Feb. 23, two days early. Since that time, it has surged about 600 points, or 15%.

But when in a bear market, as on the

NYSE

, an oversold reading can simply mean some of the downside momentum has been lost, or it can mean the market is ready for an oversold rally to relieve some of the downside pressure. There is rarely any jumping of the gun. When this happens, the market typically waits for a deeply oversold reading before rallying. Over on the

S&P 500

, we got oversold on Feb. 25, but the rally did not begin until the following Monday, and the oversold reading only produced a meager 5% rally.

I bring this up because both markets will reach maximum overbought readings later this week, or Monday at the latest.

As the Nasdaq reaches its overbought reading, we can likely expect more of the same sort of action we've seen at previous overbought readings: some form of digestion. There was the very minor dip at the November overbought reading, but that was quite early in this leg of the bull run. There was the much larger, longer-lasting correction we saw in January from the January overbought reading. And then there was the small sideways move we saw in mid-February from the most recent overbought reading. Each overbought reading has led to an oversold buying opportunity.

You may notice that the Nasdaq's oscillator has not yet surpassed its previous highs, or overbought readings. There is no reason to be concerned at that, unless it fails to do so before it gets maximum overbought.

Remember, this indicator is a function of price and time, so we must give it a chance to make its move.

Several what-ifs tell me that the Nasdaq would have to reverse its course and head down pretty hard here for this oscillator not to make a new high on this leg up. And if it did make such a reversal, prior to getting maximum overbought, then I'd be concerned, but not before.

Over on the NYSE, the big bad bear market, we should give this oscillator some more time too, but just as a bull jumps the gun to get going when oversold, a bear can jump the gun when getting overbought. Here, what-ifs produce a lower high, even if we had five days of rallying such as we saw Friday, and I can't imagine that happening. Either way, as I've said here before, I do not expect a rally on the NYSE to be sustainable at this point in time. We may come to a point where this market finally looks sold out and bottoming, but this market just doesn't seem to have the ammunition to put any force behind a decent rally right now.

Instead of offering names to buy today, there are so many weak stocks on the NYSE that we should not ignore them.

PepsiCo

TheStreet Recommends

(PEP) - Get Report

has lost its fizz. There's almost no discernable breakdown level, since there's that little support at 28 to 30 -- but where is this stock going on the upside? Nowhere. Go back to the discussion on volume from Friday's

column: This stock has not yet seen that big increase in volume that tells us we're getting close to the end. Instead, Pepsi shareholders are still holding on; they haven't reached that dumping stage yet.

And in the drug sector, they continue to slide. Three big-name stocks have lower downside targets. As always, I do not expect they will get there in a straight line -- in fact they should attempt to hold at some point in here -- but I offer up the calculated targets as follows:

Schering-Plough

(SGP)

is 26;

Merck

(MRK) - Get Report

is 40; and

Bristol-Myers Squibb

(BMY) - Get Report

is 38.

What I find most interesting about both oscillators right now is the timing: They both will reach maximum overbought readings just over one week before the

Fed

meets again. One of the practices this market has taken to over the past year or so has been to sell off in anticipation of the Fed meeting, only to rise at its conclusion. Why should we expect it to be any different this time?

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

KPMHSM@aol.com.