Chartists See Months of Market Discontent
August 18, 2001 07:05 PM ET
By Haitham Haddadin
NEW YORK (Reuters) - Tired of the dog days of summer? Brace yourself for an autumn of discontent and even a winter of woe on Wall Street, leading technical analysts say.
"I would not be surprised if you called me six months from now and we've stayed at the same spot or lower from here," said Gary Kaltbaum, analyst at J.W. Genesis, in Boca Raton, Florida. "At best the market remains stuck in range."
Even market bulls are treading cautiously.
"I am calling it a Woody Hayes market. If you remember your football: three yards and a cloud of dust," says Al Goldman of A.G. Edwards, referring to the late Ohio State University's coach whose brand of football was considered successful, though unexciting.
Goldman a few months back declared that the bear scaring investors from the Street was dead. Now he looks for a sideways market with upside bias in months ahead -- a teetering infant bull learning how to walk, not the charging beast of the 1990s that logged the longest bull run in U.S. history.
Other chartists interviewed by Reuters see a bleaker picture: a sideways market or one mired in a downtrend. Some of these analysts, who base forecasts mostly on price action and disregard economic or company fundamentals, even warn that the major market averages could plunge to two-year lows.
That scenario would become more real if the indexes sink through key "support" levels, or levels at which buyers have in the past emerged to snatch up stocks after a downturn.
These levels roughly are at 1,170 points for the broad Standard & Poor's 500 .SPX index; 1,950 points for the tech-laden Nasdaq Composite Index .IXIC and a band stretching from 10,200 to 10,100 points for the blue-chip Dow Jones industrials average .DJI, chartists say. The indexes currently trade 1 to 2 percent above those levels.
"These are the three downside levels to watch that the bulls need to defend to prevent this market from really going into a downturn," said Ricky Harrington, technical analyst at Wachovia Securities in Charlotte, North Carolina.
STIFF RESISTANCE TO POTENTIAL RALLIES
Weary investors got some respite with a late spring rally that lifted Nasdaq by as much as 40 percent from April lows. But the party didn't last. After topping in late May, the market steadily gave back gains, and now the charts of the Nasdaq, Dow and S&P all show a series of lower highs and lower lows, or bearish technical formations.
A sustainable market rally at best will be labored, the pundits say. Massive walls of "resistance" have to be pierced -- levels where investors looking to break even or get out with a small profit unleash a lot of share supply, thwarting rallies.
Initial resistance for the Dow index is at 10,600, where its most recent rally fell apart, says Harrington, followed by a formidable area starting at 11,000. If it breaks above 10,800, it could go some 200 to 300 points higher, he says, but adds conditions are not ripe for a major up move.
"As you go into September and October, there's a risk of the (Dow) penetrating 10,000 on the downside, rather than going to new highs," he told Reuters.
Nasdaq is more worrisome. The market peaked at over 5,000 in March 2000 as blindsided investors bid up tech stocks only to plunge to 1,619 on April 4, 2001. Nasdaq's most recent rally took it to over 2,300 by May 22, but by Aug. 10 it fell to as low as 1,915.99, raising eyebrows on Wall Street.
"Very, very short-term all these levels are being challenged," said Ralph Acampora, Prudential Securities' star technical analyst. "I don't say they are broken right now, but the fact that everybody sees them will probably in and of itself cause a little bit of concern in the marketplace."
Acampora, who puts Nasdaq support at 1,935 followed by 1,869, adds he doesn't yet see the spring lows being tested. Acampora has been chanting the mantra "it's not a stock market, it's a market of stocks," and focuses more on individual big tech stocks like Web gear giant Cisco Systems Inc. and network computing firm Sun Microsystems , which although weaker, remain in a trading range.
"But if they take out their 52-week lows then I am out of Dodge," he told Reuters, referring to the city of Wild West fame.
LACK OF LEADERSHIP
No particular sector is poised to lead the market higher, and that's worrying technicians.
Bulls drew fuel from a recent rally in the stocks of computer-chip makers amid hopes that the group may have seen the worst. That sent the sector's key gauge, the Philadelphia semiconductor index <.SOXX>, above its 200-day moving average, which some saw as a positive sign. But the euphoria was short-lived and the index has since fallen below that level.
In fact, the last three months have seen the breakdown of sectors that had put on rallies, said Kaltbaum of J.W. Genesis, such as homebuilders, retailers, insurance companies, utilities, tobacco and restaurants. They topped out and then broke support on the way down, Kaltbaum notes.
"I just don't think there's any upside and the simple reason is there really isn't any leadership left in the market," he said.
But optimists like Goldman of A.G. Edwards point to technical indicators like the advance-decline line -- the ratio of rising to falling stocks, which is seen as a gauge of the market's underlying health. He says the ratio is positive for all issues traded on the New York Stock Exchange.
Although the indexes are down year to date, he says close to 68 percent of Nasdaq stocks, 66 percent of New York Stock Exchange stocks and 55 percent of all S&P 500 stocks are up over the same period.
"It has not been fabulous but it hasn't been bad like the bears will tell you. Don't talk to the bears, they're no fun!"
Others disagree. While the bulls hang their hats on a popular notion that stocks could rally as the sluggish U.S. economy picks up steam later this year -- on the back of aggressive interest rate cuts by the Federal Reserve and tax rebates from Uncle Sam -- the bears say the problem is that stocks still are expensive despite the past year's carnage.
"It's going to take time," said Ed Nicoski, analyst at U.S. Bancorp Piper Jaffray in Minneapolis. "It's a market that's looking for direction and that has to go through a process and that is a process of investors stop looking for rallies and start to become disinterested."
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