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April 25, 2000

As I watch one market player after another give interviews about the decline of the

Nasdaq Composite Index

on Monday, I'm amazed how one-sided the view is: We have seen the low and Monday was a successful test. In my opinion, Monday was not a true, successful test of the April 17 low. A true, successful test would've taken the Nasdaq down to a new intraday (or closing) low while the underlying statistics held. Frankly, sentiment is in the wrong place for this to be a great low.

There were some signs of holding into yesterday's low.

But this is short-term stuff; sentiment is the major ingredient missing from this "real bottom."

Almost every major bottom has been accompanied by a great deal of bearishness. For that reason, I believe this is all part of the process of trying to find a bottom. Because we need a series of rallies and declines to make up bases, it appears we're about to have an upward bias for the remainder of the week.

The first sign of a short-term low comes from the oscillator. It is oversold, and yesterday's decline, even at its worst, never came close to the oversold reading we saw on April 17. So we've got a higher low, or a less oversold reading, which creates a positive divergence. Sure, it would've been better if we had broken those lows of 10 days ago, but we didn't. But now we must look forward, and since the oscillator is a 10-day moving average, we can see the numbers we are "dropping." Here's what that string looks like through the end of the week:





For this reason, even declines on the Nasdaq should show very little downside momentum for the remainder of the week, and any rallies should show upside momentum.

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There's also the obvious contraction in the number of stocks making new lows. On April 17, there were 505 stocks at new lows. Monday, with the Nasdaq only about 100 points away from last Monday's low, only 134 stocks made new lows. This leads me to believe that even if we had broken to new lows, we likely would not have had an increase in this number, giving us another positive divergence.

One not-so-obvious statistic comes from the cumulative advance/decline line on the Nasdaq. While I monitor this statistic daily, I rarely write about it because it typically has just one direction: down. But I noticed Monday that it actually held at a higher low than one week ago. And it wasn't just the cumulative a/d that caught my eye; the cumulative volume did the same as well. The cumulative volume on the Nasdaq is much more indicative of this market because it shows where the action is, and therefore can be used to confirm a move on the Nasdaq.

One final note in all of this is that the decline came on news. Real news. Earnings news.


(MSFT) - Get Microsoft Corporation Report

disappointed us, not only in its revenue shortfall, but also in the forecast going forward. That is not the kind of news the market likes -- disappointment from a bellwether. And yet, despite this news, the market did not collapse. It is not the news, but rather how the market reacts to the news, that's important.

I've just laid out several reasons why Monday's action looks like a short-term low, so why am I still cautious? It's the sentiment. I have rarely seen a true market low come when everyone was looking for it. And it's not just the anecdotal evidence I see on TV and read in the newspapers. Just look at the

Investor's Intelligence

bull/bear numbers. While we have yet to see those numbers for this week (they will be out Wednesday), as of last week the bulls were still hovering at 55%. And the bears? Just under 30% at 28.5%. You can see from the chart that at the October 1999 lows, we had both bulls and bears in the 40% range. These current figures tell me we do not have sentiment in the right place just now.

In order for a sustainable rally to occur, stocks must build bases. In order to build bases, stocks must spend some time rallying and selling off, putting the market in some sort of trading range for the foreseeable future. So it appears to me that while we can call for short-term lows, there will also be short-term highs giving us plenty of market swings, but not a lot of trend for the next few months. And for now, it seems we are closer to one of those short-term lows than we are to the highs.

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 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 was long Microsoft, 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