The Daily Chartist: Tuesday's Tech Rally Tells a Base Building Story

In this plot, stocks won't make progress even though they have room to move.
Author:
Publish date:

May 31, 2000

By now, everyone knows the negatives of Tuesday's rally: low volume, end-of-the month markups and short covering. Volume was lower than it has been, and it's going to be a long time before we see the kind of volume we saw in the first quarter. Maybe portfolio managers were marking up their down-and-out tech stocks for the month end, and maybe the rally was all short covering, but don't all rallies begin with short covering?

There is more to come in this rally. The oscillator still says we're oversold, and many stocks haven't reached their

resistance levels yet, so they still have room to move.

I've recreated a chart of

Sun Microsystems

(SUNW) - Get Report

from early 1997 through year-end 1998. Because so many folks seem to think that tech stocks don't require the same basing period that all other groups require, I thought I'd show Sun's action after it made its high in summer 1997. While these numbers have been split-adjusted, the decline was still close to 50% from August through November that year. Sun rallied from that low in November 1997 but spent an entire year backing and filling, essentially going nowhere before moving higher. That is what base building looks like.

As long as rallies continue to fail at resistance and hold at

support, this is what we can expect -- and it will be this way for some time to come. Tech stocks are in the rally phase, but as you can see from this chart, it's too early for them to make much progress.

Overbought/Oversold Oscillators

For an explanation of these indicators, check out The Chartist's

primer.

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.