The Correction is Over -- Get Set for New Highs
By Ralph J. Acampora
July 14, 1999
The technical analysis group at Prudential Securities has always worked with two
separate but equally important disciplines: the macro, or top-down, approach (which
uses a series of technical indicators) and the micro, or bottom-up, approach (which
deals exclusively with individual stock-chart patterns). Since early May, both of
these measurements have called for "a normal market correction." I defined
"normal" as a decline of five percent to 10 percent for the leading averages.
Over the past two months, the Dow Jones Industrial Average (DJIA) and S&P 500
have dropped 6.5 and 7.2 percent from their respective intraday highs to their
intraday lows. During the course of this correction, I wrote that I would like to see a couple of macro
factors improve.
I wanted to see a deeper oversold condition materialize, which would suggest that we had seen the end
of the market's downward momentum, and I insisted that sentiment had to turn more bearish. For too
long a period of time, investors had become a bit too complacent -- in fact, I felt that a mini-washout in
price would most likely highlight the climactic end to this corrective phase and produce the fear that
normally attends a significant market low.
These were the key top-down elements that I felt were needed for me to be comfortable in calling an end
to the correction. Guess what? They never materialized. We fulfilled only the percentage decline
requirements for the DJIA and S&P 500, whereas the other macro technical factors were not satisfied.
That's the bad news -- but now for the good, or should I say, great news. The micro technical input is
literally on fire with positive graphs. These individual stock charts look fantastic, suggesting that, unlike
the liquidation of last summer, we are enjoying the benefits of stock rotation. The lifeline of any bull
market is an increase of new, emerging names that attract investor attention. A normal correction would
allow for the unwinding of the excesses created by the Internet stocks and the overvaluation in the key
large-cap names -- all of which has transpired, setting the stage for the resumption of the bull market.
The most exciting aspect of this new upward momentum in the market is that it is broad based and that
these stocks are now positioned for sizable advances. Here are some of the attractive names:
Ameritech (NYSE: AIT) has been confined to a six-month trading range bounded by a low of about 58
and a high near 70. This tight band of price activity suffered no major damage during the market's recent
corrective phase. AIT recently hit a new all-time high with prospects of moving into the low 90s.
Bell Atlantic (NYSE: BEL) just broke out of a seven-month trading range. This extended period of
consolidation now looks to be the floor for another major rise that could take prices in the 75-80 area.
Like Ameritech, this stock is also confirming the Bell sector's renewed strength and investor interest.
Polaroid (NYSE: PRD) recently broke a one-and-a-half year downtrend in price and built an impressive
base formation. The most recent price activity suggests that PRD could embark upon another significant
rise that could carry it back into the low 40s. Historically, this stock has made major reversals from
these lows in the past.
Wellman (NYSE: WLM) is trading at its highest price since the third quarter of 1998. The strength in
price, accompanied by increased volume, represents an impressive upside breakout from a major base
formation. This combination is very powerful and enhances my expectations for an eventual move to the
20-25 area. |
