The Tao of the Dow

Sometimes, simple reviews of price action reveal more insights than the most sophisticated indicators.
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When I want to break the market down into its simplest form, I review the stocks in the Dow Jones Industrial Average using weekly charts. I love the simplicity of this exercise for three reasons: It is a pure search, one solely seeking what's moving; it eliminates indicator work that often obscures important stock action; and it gives me time to work on more important things, such as learning the names of the dinosaurs that lived during the Cretaceous period so I can teach them to my kids.

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You might think it's wacky to believe anyone can get a handle on the stock market by reviewing the charts of the 30 stocks in the DJIA. But it's no crazier than believing last Friday's

employment number of negative 8,000 was legitimate when the consensus estimate was looking for a

gain

of 220,000. Sorry, but I tend to remember this type of economic forecasting -- just in case anyone ever doubts the legitimacy of technical analysis again.

As I was saying, about the components in the DJIA, here's what I found:

The Strongest Components of the DJIA Right Now

My bellwether, and the most important stock in the world,

General Electric

(GE) - Get Report

is bullish, at a new all-time high and virtually immaculate. Sure, it's overbought, but if some people are waiting for GE to crack, they've got a long wait.

Second only to GE in terms of importance is

American Express

(AXP) - Get Report

. American Express is also bullish, as it has moved to a new all-time high following similar action in its relative performance vs. the DJIA and the

S&P 500

.

The breakout action in

Wal-Mart

(WMT) - Get Report

says "stop dreaming, kid" to anyone who thought the retail-stock malaise meant the economy was slowing. Wal-Mart is bullish once again after breaking out of a base of more than six months long. Relative action vs. the DJIA and the S&P 500 is also bullish and at a new high. The breakout implies a first target of 67.

Generally Bullish Components Still Consolidating

Alcoa

(AA) - Get Report

,

AlliedSignal

(ALD)

,

Caterpillar

(CAT) - Get Report

,

Citigroup

(C) - Get Report

,

Johnson & Johnson

(JNJ) - Get Report

,

McDonald's

(MCD) - Get Report

,

Merck

(MRK) - Get Report

,

Procter & Gamble

(PG) - Get Report

and

Union Carbide

(UK)

.

Neutral Components

Boeing

(BA) - Get Report

,

Chevron

(CHV)

,

DuPont

(DD) - Get Report

,

Eastman Kodak

(EK)

,

Exxon

(XON) - Get Report

,

General Motors

(GM) - Get Report

,

International Paper

(IP) - Get Report

,

J.P. Morgan

(JPM) - Get Report

,

Minnesota Mining

(MMM) - Get Report

and

United Technologies

.

Weakest Components of the DJIA Right Now

Disney

(DIS) - Get Report

,

Goodyear Tire

(GT) - Get Report

,

Coca-Cola

(KO) - Get Report

,

Philip Morris

(MO) - Get Report

and

Sears

(S) - Get Report

. These guys can bounce at any time, but come to think of it, so can rubber cement after you let it harden and then roll it up into a ball. Until their relative strength vs. the DJIA and the S&P 500 can change direction from down to up, it's better to focus on winning stocks.

Bouncers

This is a category I use to identify stocks that have suffered sharp declines, are into an area of support and should bounce. But there is not yet evidence of a base to suggest the bounce will carry substantially higher. The "bouncers" are

Hewlett-Packard

(HWP)

,

IBM

(IBM) - Get Report

and

AT&T

(T) - Get Report

. H-P and IBM definitely need to consolidate and repair some of their recent damage. For instance, H-P needs to hold above the 80 level, which is good support, and IBM gets the benefit of the doubt unless it closes under support at 110.

Meanwhile, if you can buy AT&T between 40 and 45, I think it's a good idea to step up to the plate and take your cuts. The stock is in the process of putting in a higher low (on the weekly chart), so the lower 40s look good to me. AT&T should not turn on a dime and move much higher from here, but it should do fine after a minor consolidation phase. Use a mental stop of 39 3/4 because if the stock closes under there, there's risk to 30.

My Take

All in all, there are more reasons to be constructive here than not. I may have been too conservative last week when I

wrote that the market would have a

Gary Coleman

-sized rally, but when bonds are bearish I find it hard to be anything more than cautiously greedy. However, given the construction of the chart patterns for the stocks in the DJIA it seems the bearish action in the 30-year Treasury (and, if Friday's employment report was so bullish, why didn't bonds rally?) isn't really a concern. I've still got my eye on 6.27%, but it seems that we've got a few more at-bats before the game is over.

Follow Up

In my column

last week, I mentioned

JDA Software

(JDAS)

as one of the six software stocks that are exhibiting promising chart action. Not long after, management announced that third-quarter earnings won't meet estimates because its software-licensing revenue slipped. This is not a good sign, and despite the generally favorable pattern setup, cannot be spun positively. The pattern for JDA Software has been damaged, and I believe the need to repair itself will be substantial.

I am no fan of downside gaps that accompany disappointing earnings news -- and this is no exception. Having been burned on JDA Software, here's how I deal with downside gaps that accompany disappointing earnings news: I sell. My experience suggests that earnings troubles are not usually confined to one instance, and this type of announcement is usually followed by similar ones in upcoming quarters. This may result in my being wrong twice, but I remain strict to my modus operandi.

Key support levels for JDA Software include 9 1/2, or roughly the level of the 50-day moving average. A close under here says 8 1/2 follows. As a result of the scorching, I will not revisit JDA Software until it can engineer a successful close above 12 1/4.

John Roque is the technical analyst at Arnhold & S. Bleichroeder, a New York-based investment brokerage firm specializing in Europe and the U.S., and a frequent guest on CNBC. At time of publication, Roque had no position in any of the 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. Roque appreciates your feedback at

jroque@thestreet.com.