Still Needing Repair

Until the market's intermediate-term statistics curl under and change direction, Helene Meisler argues, the correction will continue.
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As I watched one of those

CNBC

bull-against-bear debates this week, I noticed a small change. It was very subtle and there was no real way to quantify it, but it was there all the same. The bull was definitely the one who was nervous. Now that's a change.

The debate was on the Internet stocks. The bull was an analyst at

SG Cowen

who's name I've forgotten. The bear was Jim Grant. The bullish analyst was almost apologizing for his position. I can't recall how many times he said something about how he

thought

we're at a bottom and excused himself for not being good at picking bottoms or some such phrase. He certainly was not pounding the table and told us several times that you needed a very long-term horizon if you're going to buy these stocks.

He struck me as one nervous bull.

Then there's also the absence of Abby. Typically when the

S&P 500

has a big slide (in this case, about 100 points),

Abby Joseph Cohen

is out there telling us to buy the dip. Where has Abby been lately? I'm not saying she's turned bearish, but her silence is deafening.

There's nothing like a good, solid correction to scare the bulls. First they are still bullish but looking for a correction. Then they quietly slip into the bearish camp. That's when we know we're close to a low worth buying -- when the former bulls have thrown in the towel. We've gotten closer to that sentiment, but we're not quite there yet.

This process takes time. Let's face it: Folks don't turn bullish overnight. So why should they scoff at a market that's been so good to them on the long side for so long? It should take a while. This week's action can do a lot to move sentiment in the right direction.

That oversold rally we had on Wednesday came midday, just as everyone was claiming the Internet bubble had burst. Heck, after all,

America Online

(AOL)

had broken that 112 level the entire world was watching. Of course, when AOL broke that level, the shorts jumped on board. I could hear the screams all the way over here in Singapore, "It's broken support. It's over!" Then, just as soon as it broke, it rallied. Of course it did, that 112 level was so obvious it was useless.

(Before I get a zillion questions on my AOL opinion, I would say I'm neutral. I like bases and AOL doesn't have one, so I am not a buyer. It has support around par. What else can I say about a stock that could just as easily rally 15 as sell off 15?)

Anyway, back to this week's action. The oversold rally makes the bulls feel better. Then, the next day, the market takes it all away again. This does not do a lot to boost the confidence of those bulls, so we lose a few more bulls. This is how the bulls turn to bears. But you can clearly see that it is not as though everyone jumps over the fence on the same day. It's a slow process that takes time.

The market is clearly oversold now. It should bounce over the next few trading days, although I'm not sure how many will want to go home long over the holiday weekend. However, bear in mind that all we're looking for is an oversold rally right now. Oversold rallies are not supposed to be great rallies; they are simply meant to relieve some of the downside pressure. We need several other indicators to line up before we can say it's a rally worth buying. And it is just too soon to say such a thing.

For example, the advance/decline line needs to improve. It continues to act poorly, and that needs to change before we can expect a rally worth buying. The

McClellan Summation

index rolled over two weeks ago and shows no sign of reversing back to the upside just yet. Since this indicator is based on the A/D line as well, you can see the need for improvement in the A/D.

The number of stocks making new lows refuses to expand with each decline. I consider that a positive for stocks, but with that the only positive to point at, it's hard to get excited about the buy side just now. We will have to wait for the other indicators to show positive signs as well.

As for individual stocks,

Chevron

(CHV)

is still a good-looking chart.

Coke

(KO) - Get Report

is still building its base and is buyable for the longer term.

Colgate

(CL) - Get Report

has acted superbly into this entire weakness, although I certainly wouldn't chase it.

On the negative side, the list is somewhat longer.

McDonald's

(MCD) - Get Report

has finally picked up some steam on the downside, but its target is only around 36.

Merck

(MRK) - Get Report

does not act well at all -- sell rallies.

United Technologies

(UTX) - Get Report

has broken -- it's a sale.

American Express

(AXP) - Get Report

and

Citigroup

(C) - Get Report

did not make new intraday lows Thursday, but I suspect they will shortly.

Outside the

Dow

,

Intel

(INTC) - Get Report

, having broken 55 rather convincingly, is now a sale back near 56.

Chase Manhattan

(CMB)

does not act well, and neither does

Bank of America

(BAC) - Get Report

. I think I'm quite early on

Federal Express

(FDX) - Get Report

, but I'd look to sell it while it's still up near its highs.

I continue to expect some sort of oversold rally in the very near term. However, I do not think that an oversold rally is one worth buying. Stocks need time to repair the damage that's been done. An oversold rally helps that happen by allowing stocks to back and fill. Until the intermediate-term statistics curl under and change direction, the correction continues.

Author's note: I depart next week for a short trip back to the U.S. I'll write my regular column on Monday -- Memorial Day -- rather than on Tuesday. Enjoy the long weekend!

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.