Internet Stock Technical Trends
1:46 PM. Wednesday, August 18, 1999
by Clif Droke
Recovering from the deeply over-sold conditions of the past several weeks, the U.S.
equities market registered a short-term bottom last week and momentum should carry
the markets higher over the next week to one month, though there is no telling how
high prices will carry.
Our short-term momentum indicators (10-day and 30-day Rate of Change(ROC) gave
us a buy signal late last week and should be sufficient to propel the broad market,
including the Internet sector, into higher terrain over the next several days. 10-day
momentum registered a bullish head and shoulders bottom pattern and is rocketing
higher in linear fashion as we head into the middle of the month. 30-day volume, while
not as bullish, is at least stabilizing from its recent declines. Also, the momentum
indicators for many leading stocks registered double bottoms last week and were
starting to trend higher from oversold levels, a bullish sign.
Coinciding with this bullish reading in momentum was a chorus of bearish rumblings
from a multitude of analysts-including many formerly bullish ones-which should serve
as a contrarian signal that the worst is behind us, at least for now.
Volume indicators, too, have perked up somewhat from their previously disturbing
levels and while they are by no means sending all-out bullish signals they nevertheless
appear to have bottomed in the short-term along with momentum. Our 5-day NYSE
Advancing Volume chart broke out of a bullish wedge pattern last week and is now
above its equilibrium line which places it in technically bullish territory (but just barely).
We won't have a true bullish confirmation until advancing volume continues to trend
higher over the next several days, but at least volume is confirming the immediate-term
trend, which is up. Similarly, 5-day NYSE Declining Volume broke to the downside out
of a rising wedge pattern last week. As long as declining volume is falling-which it
is-the markets are not in any danger of collapsing any time soon. Cumulative volume,
as measured by the CVI, is still in a technical downtrend but it was starting to pick up
a bit as the week ended and had at least stopped plummeting as it had been for the
past couple of weeks. As long as cumulative volume holds steady or trends higher the
market is on a firm footing. The coming days will provide us more answers.
Trading volume itself on both the NYSE and NASDAQ has remained disturbingly thin
throughout this summer's decline, which is curious to say the least. Perhaps this thin
volume reflects widespread complacency and smug confidence on the part of traders
and investors. Perhaps it is a phenomenon of summer trading in general, when many
traders go on vacation. Whatever the reason, volume of trade represents "tidal force"
and is a reflection of the magnitude and conviction behind the prevailing price trend.
For the last several weeks that trend has been toward lower prices, and volume never
really got going behind declining prices, which no doubt prevented a more serious
correction of the variety we saw last summer. However, volume has recently begun to
pick up and most of the higher volume has come on days in which prices were higher,
which could be an early indication that the long-term uptrend is still intact. Indeed,
volume tends to move in the direction of the prevailing trend, and because volume
never gained momentum during this summer's decline we surmise that the decline
was nothing more than a correction in the market's ongoing bullish trend.
The Dow Jones Industrial (DJI) chart for the past year shows that its trendline
stretching from last September until the present was broken last month. A second,
trendline below that one was broken earlier this month. And a third trendline directly
below the second one has thus far succeeded in supporting the price trend. Perhaps
this qualifies as a bullish confirmation under the "Fanline Principle" (see our books,
Technical Analysis Simplified and/or Elliott Wave Simplified for a detailed discussion
of this important technical principle).
It cannot be denied, however, that the overall price pattern outlook for the major
averages and the vast majority of actively traded stocks is potentially bearish, as
many show textbook distribution patterns (specifically, of the rounding and head and
shoulders variety). This must be kept foremost in our considerations for longer-term
trading/investment positions and unless these patterns are nullified we must assume
that the overall market outlook is bearish and subject to a breakdown sometime this
year. In the immediate-term however, the outlook appears to be toward higher prices,
though again there is no way of forecasting the amplitude of any subsequent upward
movements.
The mutual fund outlook confirms this view. As we have mentioned in previous
commentaries, the Rydex Ursa Fund-a bear market fund tied to the SP 500-is tracing
out on its chart what appears to be a long-term rounding bottom pattern, which implies
a bear market could begin later this year (if it hasn't already). Conversely, the chart for
the Rydex Nova Fund-a bull market fund-is tracing out a long-term distribution pattern.
The short-term trends for each of these funds are bearish and bullish, respectively. But
never lose sight of the longer-term implications.
The interest rate outlook is similarly bearish in the longer-term, as the yield on the
30-year T-bond has been trending higher since last October. Typically, bond prices
peak (and yields bottom) about a year before stock prices do. Perhaps this fall will
witness a breakdown in the stock averages. Again, only time will tell.
In the meantime, we continue to tread cautiously upon this market as it is clearly on
its last legs. We are fully cognizant, however, that even a market in its death throes
can stage a spectacular last-gasp rally before finally collapsing. Thus, we want to be
in a position to capture any such gains should the market attempt a final rally. And
from the looks of the indicators, it may be attempting to do just that.
Internet Stock Analysis
Yahoo (NASDAQ: YHOO) is a tough trade. Coming off of intermediate-term lows, the
stock looks oversold and ready for a turnaround. However, its long-term chart pattern
is that of a giant descending triangle, which typically presages a major decline.
Indeed, Yahoo is poised at major support and could break through at any time.
However, its Momentum, MACD, and Money Flow indicators are all in bullish technical
positions and are on the verge of sending a buy signal. There has been tremendous
churning activity in Yahoo in the past few days and this makes it difficult to determine
whether net accumulation or distribution has been underway. Since Yahoo still trades
under its 30-day moving average, and since it still technically hasn't registered an
all-out buy signal, we'll wait on the sidelines before making a firm commitment. This
week should tell us all we need to know. Given the position of the broad market it
could easily break out to the upside, in which case we would immediately jump in and
buy shares. Scalpers and skimmers may buy Yahoo above $140. However, we urge
most traders to await a break above $160 before committing to Yahoo.
TMP Worldwide (NASDAQ: TMPW) is in a very similar position to Yahoo. Its chart
also shows a large descending triangle pattern that has been under construction since
April. Moreover, a bearish distribution pattern can be seen between the months of June
and early August (where prices arch higher in convex fashion and corresponding
volume arches lower in concave fashion). Nevertheless, momentum is poised to break
out to higher levels (and looks to have already started higher) and the MACD and
Money Flow indicators are similarly in short-term bullish positions. Speculators may
ride this stock to the expected near-term high of $50. Everyone else should avoid it
unless $50 is decisively overcome on increasing volume.
We believe brokerage firm Charles Schwab (NASDAQ: SCH) is heading toward at
least the $55 level (from its present $44) before any subsequent downturn. Although
the prevailing pattern in its chart (a broadening formation) could be interpreted as either
bullish or bearish, the near-term trend appears to be up, regardless. Momentum is
firmly in Scwab's favor, and money flow also appears to be picking up.
America Online (NYSE: AOL) should be heading to at least $110 over the next few
days. Short-term traders should position themselves to take advantage of this
expected move. However, the overall position of AOL is bearish. Only a move above
$130 on increasing volume would change this. Set your positions in AOL accordingly.
Lycos (NASDAQ: LCOS) is treading perilously close to trendline support and has even
(momentarily) broken below it before heading back up above it. This places Lycos in a
precarious position. However, its technical indicators, while still mostly trading in a
bearish position, are starting to reverse and head higher. This at least should keep
Lycos from sliding further. For now, avoid long commitments to Lycos.
Clif Droke is editor of the weekly Leading Indicators newsletter, covering the U.S.
equities market outlook from a technical perspective as well as the general economic
outlook. He is the author of the books, "Technical Analysis of the Internet Stocks,"
and "Elliott Wave Simplified." For a free sample issue of Leading Indicators, send
name and mailing address to cdroke9819@aol.com or mail to: Leading Indicators, 816
Easely St., #411, Silver Spring, MD 20910.
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