The End of Summer

The Chartist makes some pre-Labor Day observations.
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The week before Labor Day has always been a challenge for investors. There are so many people on vacation that the lighter-than-usual trading has a tendency to exacerbate moves -- in both directions. And this year will not be any better, especially in light of that dark cloud on Friday's horizon: the dreaded

employment report

.

Add to that the ugly tape of the past few days. Yeah, it's been ugly. The breadth of the market has been so poor that I wonder if it will ever look good again. The cumulative advance/decline line made a new low on Monday (vs. the Aug. 10 low), which is not a good sign. Even cumulative volume, which had been doing much better than the a/d line, is struggling to stay above its recent lows.

Even some of those momentum indicators I've discussed recently are beginning to lose their steam and are in jeopardy of rolling over again. For example, I expect that the new highs minus new lows on a 10-day moving average will roll over within a few days.

And how 'bout those rising interest rates?

Alan Greenspan's

comments on Friday were just adding fuel to that fire, which in turn did not exactly help equity prices.

And, of course, the market's still not oversold.

So where's all that improvement coming from? Mostly it comes from the individual stock charts (more about that later), but also it comes from the excessive downside move which ended on Aug. 10.

The overbought/oversold oscillator reached a very extreme oversold condition. That big swing down took us to a low not seen since last year at this time (and we all know what was happening then). I've blown up the overbought/oversold oscillator from that period to better illustrate one of the uses for this indicator.

Typically we get an extreme reading (in this case, I've marked it as Point A on the chart). We rally from that extreme reading, only to come down again upon reaching an overbought reading. However, very often that next leg down lacks the same momentum that the first leg down had, and we get a higher low in the indicator (Point B), showing a lessening of the downside momentum. If this current down leg does not lead to a lower low, but rather gives us a higher low, that would be positive.

Something else that is encouraging continues to be the lack of expansion in the number of stocks making new lows, especially in light of the fact that the a/d line has made a new low. Normally when the a/d line makes a new low, we see an expansion in the stocks at new lows. So far, that has not been the case.

Here's what we want to look for as the market declines: stocks holding at higher lows. For example,

American Express

(AXP) - Get Report

made a low in early August at 120; it's currently trading at 140. Although anything is possible, it is difficult to imagine that American Express will break that recent 120 low in a meaningful way. It is more likely to hold at a higher low.

Chase

(CMB)

is another stock I think will hold at a higher low. Its August low is 72; it is currently just over 81. What I find most interesting about these two stocks holding at higher lows is the fact that the

New York Finance Index

, of which these two stocks are members, is only pennies shy of making a new low, yet these stocks are not participating in that decline.

That is one of the best ways I know of to determine whether the stocks you are holding are going to be OK when this decline is over. It's all about relative strength, and you want to own stocks which show relative strength into a decline. If your stocks are breaking past their early August lows, I would be suspicious of them.

Some charts which are consolidating their recent gains rather well include

Johnson & Johnson

(JNJ) - Get Report

and

Abbott Labs

(ABT) - Get Report

in the drug group. Some other consumer stocks which have held well are the soaps --

Procter & Gamble

(PG) - Get Report

and

Colgate

(CL) - Get Report

.

Anheuser-Busch

(BUD) - Get Report

is also holding rather well.

And how can I let a day go by and not mention the cereal stocks?

General Mills

(GIS) - Get Report

and

Kellogg

(K) - Get Report

continue to build their bases. Even

Sara Lee

(SLE)

doesn't want to go down any more.

On the negative side, I write down

AlliedSignal

(ALD)

,

Du Pont

(DD) - Get Report

and

Sears

(S) - Get Report

in the

Dow

. The oil service stocks are still on shaky ground, in my opinion. In retail land,

Limited

(LTD)

,

J.C. Penney

(JCP) - Get Report

and

Toys R Us

(TOY)

are simply stocks in downtrends.

As the end of summer draws near and children get ready to go back to school, it's only fitting that the market begins its test. It is currently testing the downside. Tests are not fun. If you're like most folks, you never looked forward to them. Let's hope this test is successful and the higher lows we expect to see do materialize.

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.