March 28, 2000

There are V bottoms, U bottoms, W bottoms -- all sorts of ways to make a bottom, but I am a fan of testing, which means I prefer a W bottom.

In a V bottom, a stock price will slide, and after a selling climax (a high-volume decline) the stock will abruptly reverse and climb, never looking back. I don't trust that sort of bottom because after such selling pressure it's too rare to find such a quick change in sentiment. V bottoms are more common when they are news-related.

I trust a W bottom much more than I do a V bottom. With a W, you get a downward whack, followed by an upward release with a subsequent downside move. That second downside move will often hold at the same low as the first time down, or a higher low, thus forming a bottom that looks like a W. If the stock does hold at or higher than the previous low, I call that a successful test of the low and consider that bullish.

And how about that rally in the middle of the W? That rally will often stop right at resistance. Most stocks will stop their first time up to resistance, as sellers are happy just to get out even. This entire process of forming a bottom is really a series of testing the lows and eating through resistance, which means a short-term bottom looks more like a W, while a base looks more like a series of W's. Many stocks, both in the Old Economy and New Economy, are somewhere in the middle of their first W's.

In the Old Economy stocks, this is most obvious in the pharmaceutical sector. On the

Merck

(MRK) - Get Report

chart, you can see that once this stock broke the mid-60s, it slid steadily, almost in a straight line, to 52. Its rally from 52 ran into some very light resistance around 60 before coming back down. But that next trip down held at 56, a higher low. That was a very minor W and good news for Merck. The subsequent rally eats further into resistance, getting back to the mid-60s this time.

Merck has now backed off again and continues to work on its W's. Eating through resistance will take much longer than a few weeks. Ever since last August, this stock had held above 60 so it's got six months of resistance to eat through. We can't expect it to do that in just one month. This is just one of the reasons I believe the downside helps many of these stocks: It gives them another chance to hold at a higher low, forming a series of W's, eventually building enough strength to eat through that resistance. But you can see how much time and work it takes.

On the

Nasdaq

, we have a similar situation with much less resistance. This recent correction has done quite a bit of damage in many of the highflying

New Tech 30 stocks. But last Monday these stocks started to hold, in advance of the Nasdaq Composite holding.

The problem on the Nasdaq lies on the upside right now. It seems there hasn't been enough work done on the downside to warrant a sustainable rally at this point. The resistance is not meaningful in most of these stocks. It just seems they need to do more work on the downside. The

TheStreet Recommends

Nasdaq Unweighted Average

is a good example of this. It outperformed when the Nasdaq was sliding early last week, but it hardly participated in the latter part of the week's rally. Aside from looking at the chart, it helps if you see the raw data for last week's Nasdaq performance. While things improved on Thursday and Friday, you can still see the disparity.

In addition to this, the volume on the Nasdaq has fallen off rather markedly during this rally, which says we're likely still missing that second leg down to form some W's.

Finally, with all the rallying that has taken place, the oscillator has hardly budged. It still has room to move, and it is still oversold, but if this rally were going to be sustainable this time up, it should have moved to the upside already, and it hasn't. It seems to be eating up time without moving ahead. (See my

primer for an explanation of this indicator.)

This is not awful. This does not make the stocks bearish. It just means they need to do some more work before they can rally to the next level. In fact, it helps if you look at the

Yahoo!

(YHOO)

chart. It almost seems as if Yahoo! spent all of 1999 forming W's before zooming to new heights in the fourth quarter. It came down to the 150 area and has now begun forming W's again, only this time at a higher level.

Sure, we've got window-dressing going on this last week of the quarter -- but by now

CNBC

has discussed it so much that you'd have to be living under a rock not to know this is typically an "up" week for the market. And the oscillators are still not maximum overbought, so there may be more to come. But the point is that we should not fear the downside because it may just help these stocks look better on the charts, especially those that are having trouble getting through resistance.

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.