Riding on the Nasdaq Roller Coaster

We're going to see more stomach-churning action before the ride's over, The Chartist says.
Author:
Publish date:

Feb. 1, 2000

Several years ago, I was at the

Valley Fair

amusement park in Minnesota. They had just opened a new roller coaster called The Wild Thing. Among the many thrills this ride offered was a roughly 200-foot climb followed by a sheer drop of the same magnitude -- and not just once, but twice! And like many roller coasters, it begins with a big climb, a big drop, a couple of loop-de-loops in the middle and the big last whoosh down again at the end.

Join the discussion on

TSC

Message Boards.Sound familiar? It should because that's exactly what the

Nasdaq

did in January, and you didn't even have to leave your desk! All the stomach-churning action was right there for you. But this is not the first time you've lived through this.

Of course by now it seems like eons ago, but it was only during the first nine months of 1999 that we saw similar action in the market. I thought

Yahoo!

(YHOO)

was one of the best examples of the wild swings the market took last year, but when viewed a year later, we can not only see what this stock and many technology stocks did, but we can also extrapolate what things might look like going forward.

First, let's look at the action for the past month: The stock is down about 200 bucks, or 40%, from its high. Wow! Maybe you knew that already or maybe you hadn't paid attention since no one seems to talk about Yahoo! anymore. Even the volume's begun to dry up. It's been quite an orderly decline, post a giant run-up, which is a perfectly normal reaction.

Now move your eyes back several months to the April time frame. You may recall how monumental that roughly 50% decline from 250 to 120 felt at the time. There was quite some panic involved. But now look at how puny that decline looks on the chart; you almost need to squint to see it. That was the first part of our 1999 roller coaster ride: up in the first quarter, down in the second quarter, sideways in the third quarter.

What did all that up-and-down riding do for Yahoo!? It helped Yahoo! form a base. Now step back and look at the entire chart: Yahoo! spent eight months backing and filling, forming a giant base from which to launch its huge December doubling of its stock price.

What about Yahoo! now? Well, a 50% retracement, back to the point of breakout is not out of the question, but with that number at around 250, that tells me we are a lot closer to the low than to the high. This stock should find a bottom somewhere between 250 and 300. Sounds like a big range, eh? But really, it's the same as saying a 32 stock should find support in the 25-to-30 range; it's just the zeros that throw us off. History tells us not to expect Yahoo! to simply halt its slide, turn and zoom ahead back up to 500 at this point; history tells us this will take some time, even for an Internet stock.

And if we can see Yahoo! doing that, then we can likely see many of the other tech names following suit. Is that so awful? No. It's what some might call a correction, or digestion, or consolidation, or whatever else you can come up with. And as the Yahoo! chart of 1999 shows us, that can mean a lot of ups and downs before the trend takes hold again.

But what about the market's internal indicators? We are getting just about maximum oversold on the

NYSE

; the Nasdaq will take a few days longer. As the number of stocks making new lows does not expand to a great degree on the downside, we can report that many stocks are choosing to hold into these declines, and that is very good news.

So, for the most part, they act OK on the downside. Now we need to get them to act much better on the upside. For example, we've seen reversals such as yesterday's before, especially on the Nasdaq, but what was a bit different yesterday is that despite the up-50 day, the Nasdaq's upside volume never managed to squeeze out more than the downside volume. This relationship remained negative, right into the close. In the past three months, that has not been the case. For that reason, I'd like to see this indicator show some signs of life again on the upside.

As we reach these oversold levels, we should see the market have a bit more life on the upside, but it's more likely we're going to continue to see roller coaster rides such as The Wild Thing before we can enjoy a steadier ride to the upside.

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.