After the big move, many investors are understandably worried that it may be too late to buy. Despite some sluggishness late last week, the consensus view on Wall Street is that quarter-end considerations followed by preholiday trading will likely keep shares afloat until July 4.

Of course, the market has a way of frustrating as many participants as possible. So a sharper-than-expected downturn might occur, perhaps timed to disappointment with whatever the

Federal Reserve

does this week. Alternately, the much-anticipated correction might remain elusive, and some classic technical methodology suggests the rally has plenty of firepower left.

"The surprise might be

a setback doesn't come as early as those uninvested would hope for," said Henry "Hank" Pruden, executive director of the Institute for Technical Market Analysis at San Francisco's Golden Gate University.

While acknowledging the market is "always susceptible to a short-term retrenchment," Pruden suggested a more serious correction might not occur until September or October, historically a period of upheaval. (Notably, he isn't too concerned about stocks' historic summertime weakness.)

Bell-Bottoms and Bulls

At a luncheon late last week hosted by the Technical Securities Analyst Association of San Francisco, of which he is executive director, Pruden declared himself to be a "romping-stomping bull." He forecast stocks will remain in rally mode through the 2004 election, helping President Bush win re-election "in a landslide."

In a follow-up interview, Pruden explained his optimism is based partially on the "historical analog" of the early 1970s.

After a boom in the mid- to late-1960s, stocks peaked in 1968-69 and then swooned to lows in 1970, the professor recalled. Thereafter, the

Dow Jones Industrial Average

rallied sharply, establishing a (then) all-time high in 1973 shortly after the re-election of Richard Nixon. Soon thereafter, the bear market resumed with a vengeance.

Using that precedent, Pruden forecast the Dow may achieve a new high during this cycle, about a 30% rally from current levels. Pruden is even more upbeat about stock proxies in Brazil and Argentina, recommending exchange-traded funds such as the

iShares MSCI Brazil Index

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The early 1970's rally was dominated by the so-called Nifty 50 large-cap stocks. Given the vast sums indexed to broader averages today, the technician doesn't believe the current advance will be as narrowly focused. Still, he's more upbeat about the Dow vs. the

S&P 500


Nasdaq Composite

. This jibes with a view among many that the rally -- which has been very inclusive to date -- will become more focused on big-caps vs. smaller names going forward.

Spring Has Sprung

Technically speaking, Pruden's optimism is based on the fact each of the major averages is above its 200-day moving average and those moving averages are turning upward. "By definition that gives us a bull market," which has been confirmed by Dow Theory, he said. (Still, some contend the averages are vulnerable because they've gotten too far above their 200-day moving averages, currently around 8356 for the Dow, 890 for the S&P and 1385 for the Comp.)

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Pruden's bullishness is also based on the methodologies of Dr. Richard Wyckoff, one of Wall Street's most successful traders of the early 1900s and a "titan of technical analysis," according to

Technical Analysis of Stocks & Commodities.

At its core, Wyckoff's work is based on the analysis of trading ranges, and determining when stocks are in "basing," "markdown," "distribution," or "markup" phases. Incorporated into these phases are the ongoing shifts between "weak hands" (public ownership) and "composite operators", now commonly known as smart money.

Using this chart as a guide, here's a simplified overview of Wyckoff's methodology:

Wyckoff's World

Phase A is characterized by a prolonged decline to "preliminary support" (PS on the chart), which provides temporary relief before the "selling climax" (SC). That climax is accompanied by sharply expanding volume as weak holders bail out in a panic. The climax is followed by an "automatic rally" (AR), suggesting the selling has been exhausted, and then a "secondary test" (ST) of the climax lows, during which volume is diminished.

Phase B contains basing action characterized by a series of rallies and secondary tests. The "creek" on the chart basically refers to a trendline connecting peaks of said rallies. A "jump across the creek" is a "sign of strength" (SOS) that provides evidence a bottom has occurred and buyers are emerging. These "jumps" occur in phases C and D on the chart.

Also in phase C, there's another selloff and a marginal break of the selling climax lows. If such a test is accompanied by lower volume than that during the selling climax, it could be a setup for a Wyckoff Spring, a bullish pattern detailed

here in March 2001.

Following the spring (no. 8 on the chart) and those "signs of strength" in phases C and D, there's another selloff in phase D to the "last point of support" (LPS), after which this hypothetical example explodes higher.

In a real world example, Wyckoff practitioners such as Pruden believe the S&P 500's October lows represented a selling climax; the period from November to January a basing phase; and the slide in February and March a "shakeout" in prelude to a Wyckoff spring at the March lows. The relatively minor decline in late March/early April represented the "last point of support," and the best point at which to buy in Wyckoff theory. Crucially, volume was lower during declines vs. rallies in this entire period, a key sign of demand from smart money participants.

Some will dismiss all this as poppycock and others as misguided chart-reading. Indeed, one could argue last July represented the selling climax and October the shakeout and spring. Or it could all be a false breakout as the Wyckoff spring in March 2001 proved to be, albeit after a 20%-plus rally.

In the current episode, expanding volume off the bottoms in both October and March suggested the smart money was buying, making it "theoretically indifferent" as to which was the climax, Pruden observed. "Confirmation came later as

major averages surpassed the earlier resistance highs of December and January, and coincidentally were crossing 200-day moving averages," he continued. "Then I'm obligated to buy this thing."

The implication is that the rally has far more to go, although readers, of course, are not obligated to buy anything.


At the aforementioned TSAA lunch, Bruce Fraser, who co-founded the Wyckoff course Pruden teaches, examined specific charts submitted by attendees (so he didn't have advance warning). Using the Wyckoff methodology, he made the following observations:

Motorola : Fraser said the stock was missing a "sign of strength" to show that it was breaking out of a long basing pattern. Notably, the chart didn't include Thursday's session, when Motorola rose 3.7% to $9.62 on 179% of its average-daily volume for the past 30-days, according to Baseline. In the process, the stock exceeded its highs from May and June, seemingly providing that sign of strength. (My understanding of Wyckoff is that the stock is likely to pull back on lower volume before confirming that sign, assuming it will.)

General Motors : Similar to Motorla, Fraser said the stock needed a "sign of strength" to break out of its trading range. On Friday, GM rose 1.4% to $38.59 on 202% of its average volume for the past 30 days. The stock did not, however, clear its mid-January highs just above $40.

Microsoft : Big trading range from January to May, possibly leading to a Wyckoff spring on June 6. Since then, Microsoft is up 11.2% through Friday.

Newmont Mining : Saw a "selling climax" last summer, and has been a strong stock since, according to Fraser. "This stock is doing all the right things" and those so inclined should buy on a pullback into the $30-31 area. The stock slid 0.9% to $33.60 on Friday.

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

Aaron L. Task.