Reading the Market's Reaction - TheStreet

Reading the Market's Reaction

It'll be a few more days before this market is overbought. Until then, the Chartist looks at how some recent news has affected individual stocks and the overall market.
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Publish date:

Oct. 29, 1999

In the past few weeks, the market's certainly had its fair share of news: economic data gauging inflation, earnings and earnings disappointments, mergers and acquisitions and

changes in the

Dow Jones Industrial Average

, to name a few. But it's not always the news that's important -- it's often the market's reaction that helps us.

Technical Analysis: Join the discussion on

TSC

Message Boards. One week ago, the news of the repeal of the

Glass-Steagall Act

rallied the financials. Let's take a closer look at their reaction to that news, using

J.P. Morgan

(JPM) - Get Report

as an example.

Exactly one week before the announcement, J.P. Morgan made its low at 104 and change. The stock had already rallied to 118 by the time the news was announced. Now, had the good news already been discounted by the stock, we likely would've seen a muted reaction or, even worse, a selloff as investors took profits into the news. But we did not see either. Instead, we saw J.P. Morgan rise 7 bucks that day, take a breather and come on again a few days later. When a stock reacts to good news in such a positive fashion, it is always best not to fight it, but go with it.

J.P. Morgan has been in a downtrend since it made a high in May, down 30%. From such action, it's safe to assume that most, if not all, the bad news was already discounted in the stock. But very little good news was priced in. And when the good news came, it was easy for the stock to rise on the news.

What to do with J.P. Morgan now? Well, take out your pencil and draw in the downtrend line, beginning with the July high at 148 and connecting it with the late August high at 140. That line should come in right around 132, where the stock is currently trading. And if you look at the chart for the past six months, you'll see that this stock is now sitting right smack in the middle of resistance. I can't predict what the stock will do over the next few days, but over the next several weeks or months, I suspect J.P. Morgan will keep running into resistance, stumble a bit and try the upside again -- what I call backing and filling. Eventually the stock will eat through all that resistance between here and 148. That will be all part of forming the base. So the low has likely been seen, and a buy-the-dips mentality should develop with this stock, as well as many of the other financial stocks.

Most of the financial stocks are similar to J.P. Morgan in that they have rallied enough to meet their first major resistance levels and should now make higher lows on any declines, thus fleshing out their bases to a greater extent and making them much better charts.

You can also see from the chart of the

NYSE

financial index how it's run so far so fast and now finds itself sitting right smack in the middle of resistance. A period of digestion would be quite healthy now, but these are certainly no longer negative charts.

But not all stocks are reacting to positive news in the same manner. Just look at

Microsoft

(MSFT) - Get Report

. In the past two weeks, this stock has been handed two pieces of good -- no, make that great -- news, and it can't seem to get out of its own way. We've got the July high (around par) as our marker. The stock came down during the summer technology drop, only to re-emerge in late August. It didn't make a new high along with the

Nasdaq

in mid-September, which is the first sign of suspicion. It is a rare occurrence when the Nasdaq makes a new high and the largest-capitalized stock in it does not. (Sorta like the DJIA making a new high without

GE

(GE) - Get Report

).

OK, so the first piece of good news comes in the form of earnings. And boy, those

earnings were huge. For a company that normally downplays its performance, it was definitely out of character for it to be cheering its own earnings the way it did. And how did the stock react to that news? It soared ... to a lower high than it had in September. Was the good news already reflected in the stock price? It would seem that way.

Then this week, Microsoft finds itself added to the Dow. It's historical. It's a real boost for this Nasdaq stock. But all that good news is for naught: The stock is now 6 bucks lower than it was on the morning of the announcement. With all this good news, the stock is unable to rally. It appears investors are now taking profits into the good news, not chasing it. When stocks no longer react positively to good news, it usually means they're being distributed.

As for the market as a whole, it is not yet overbought; it's got another few days before it gets there. And if the oscillator can manage to make a higher high (a greater overbought reading) than the previous rally, we would have to chalk that up on the positive side as well. There is real resistance in the DJIA up in that 10,800 area (see Monday's

column for a chart and explanation) so it's still possible this rally can make it there before the oscillator reaches an overbought reading.

Overbought/Oversold Oscillator

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.