Technician's Take-- Sleuth for Signs of a Market Turn

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Did Cramer scare you out of your wits with his "crash" series? If he didn't, you're either naive or in denial. Look, you absolutely HAVE to be prepared for anything to happen in the market. Will there be another crash? Don't know. Will the market go to 20,000? Don't know.

I do know two things:

There are always plenty of clues around to help guide the way, no matter how treacherous the territory; and

I'm watching out for them every day.

And what exactly are these clues? Let me take you back to two recent periods in time....

FASTEN YOUR SEAT BELTS AND ASSUME THE SAFETY POSITION!

March 11, 1997

-- My longs are acting sluggish, and I have the sinking feeling they're not going to get any better. Either they have the flu or I do. One glance at the Advance/Decline line clears it up (click

here

) -- it's not me who's sick. The A/D line is the single best representation of overall market health, and I remain bullish until it drops consistently. On this date, it approaches its former peak ... and gets turned away. An ominous sign, but perhaps only a a temporary setback.

March 13

-- I still have quite a few longs in my portfolio, but I'm down to one bank,

(ALAB)

(click

here

). Like the other financial stocks I had, it finally capitulates and plummets. When banks go, watch out. Now I'm concerned.

March 17

-- Forget the

Dow

and

S& P 500

charts. They're not representative enough of the market. Instead watch the

NYSE

(click

here

). That's exactly what I'm doing as I see it head to its all-time high and then make an abrupt U-turn. I sense many investors still have the "buy on the dip" mentality. With what I've seen, though, I'm headed to Bearsville.

March 21

-- I have been stopped out of all long positions, and though I search daily for new ones, there is nothing that meets my criteria. However, good short candidates are numerous and now make up my entire portfolio.

(EK)

is representative (click

here

) but they all looked like this. In the next four weeks, I take on 27 new shorts, closing 21 for gains. Great trading? No, just a lousy market.

March 25

-- Daily lows on the NYSE start regularly to hit 30 or more. When this number approaches 1% of the total NYSE stocks, it's time to batten down the hatches.

March 27

-- The NYSE drops below both prior support and its 50-day moving average. It looks just like one of my short candidates -- not a good sign. Is this the forerunner of a crash? At this point, unlikely -- there's still support at NYSE 386, and beyond that, support at its 200-day moving average. If the NYSE breaks those, however, I'm moving my wife's 401-K money out of equities.

April 1

-- I'm short

(SNV) - Get Report

(click

here

), but this bank refuses to roll over, and I have to close for a loss. Could the rout be finished? I'll know if I can start finding some longs.

April 17

-- Finally spot

(SWFT)

(click

here

) heading higher and close it 11 days later for a gain. This was my first long in almost a month. Within the next few days, I add six more longs, most notably

(MSFT) - Get Report

. When market leaders return to the forefront, it's a good sign. The bull market was on the mend. The virulent stock flu was going away.

UP, UP AND AWAY?

September 2, 1997

-- My portfolio is littered with small-cap long positions, and with good reason: The

Russell

has hit a new high and looks strong (click

here

). On the flip side, I have very few stocks with fewer than four letters in the symbol. While the NYSE may have hit a bottom, the total market recovery may take awhile.

September 29

-- The Advance/Decline line makes a new high. My focus on the long side gets stronger.

September 30

-- From a half dozen short positions, I'm down to two. Quality shorts are now scarce.

October 1

-- The NYSE breaks to a new high. Are stocks overvalued? Who knows? If the NYSE were a stock, though, I'd be a buyer.

October 2

-- I'm not trading stocks, I'm running a Financial Sector fund! Insurance, banks, and S&Ls are all breaking out and dominate my holdings.

(LSBX)

is but one example.

October 6

-- My one remaining short,

(CKE)

, gets trashed (click

here

). It's painful to be short now.

October 6

-- The

Investor's Business Daily

has 1035 new highs, 15 new lows. It's not a good time to be a

Jim Grant

follower.

October 7

-- I make 10 new purchases, half financial institutions and brokerages. I pass up 20 other potential buys. My stock-picking is academic, though: By the end of the day nearly all 30 stocks have risen.

October 8

-- Greenspan rains on the parade. Well, he was due. No matter, the NYSE pulls back 1% but is still well above the resistance level (click

here

). It's not uncommon for stocks and indices to fall back to their breakout level and the NYSE may very well pullback another 2% to 500. If it can hold there, though, this bull run will be intact. On the other hand, MSFT continues to break out of its slump and the NASDAQ actually closes for a gain. All of a sudden my MSFT calls don't look so stupid.

October 9

-- Market opens down 60 points, and the bears come out of hiding. Geez, even Cramer sounds worried. Must remind myself to relax, focus on the charts, and tune out everything else. Even though I'm completely long, I'm fully prepared to go totally short if that's what the market is telling me. I don't root, I just observe.

October 10

-- The

PPI

comes in high and in typical Wall Street fashion, everyone overreacts. As long as the NYSE stays above 500, though, this is actually good: Another base will be built for the next upswing. In any event, while I've been getting nicked the past few days, my individual charts reflect only normal pullbacks. Nothing left to do but sit tight and ride out the storm.

So, are you still scared? I hope so. You should always be looking over your shoulder. But there's no need to panic. As you can see in these two time periods, clues to the market's health -- and subsequently its direction -- abound. The A/D line, the NYSE, and the number of new highs and lows, all send general market signals. The performance of your current holdings should confirm what you're seeing. Pay close attention to all of them and you should never fear a changing market. To the contrary:

You should be able to position your portfolio to take advantage of it.

One final word, though. In looking back, there have always been at least a few signals that conditions were changing. Does that imply in the future there will be similar signs? In other words, could the market ever look like

(CS) - Get Report

did on 6/3 -- a 50% drop with

no prior warning?

Dow 8000 one day; 4000 the next? I'm sad to say, the answer is yes. What could cause it? A nuclear holocaust; the alien destruction of major metropolitan areas; an instantaneous meltdown of the polar ice-caps. You know, the usual stuff. But, if any of those happen, well, we'll probably have more pressing concerns. In the meantime, try to trade like Tom Glavine pitches. In his words:

-- "You don't pick up the ball just to throw. Pay attention to what you're doing. Pay attention to how it feels."

Yes, pay attention. You'll sleep a lot easier at night.

Gary B. Smith is a freelance sportswriter who trades for his own account from his Connecticut home using technical analysis. His column, Technician's Take, appears every Monday on TheStreet.com.