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Technical Analysis: Stocks Bounce, But For How Long?

Jim Kingsland
Monday, 30 Jul 2007 | 2:58 PM ET

There isn't much doubt among technical analysts that the stock market is oversold. But that doesn't mean the major indexes are headed higher right away.

"Most daily technical indicators are oversold, as oversold as they generally get because of the speed of this decline," said John Bollinger, president of Bollinger Captial Management and the creator of the much used technical indicator known as Bollinger Bands.

"We’re trading in the realm of the lower band," he added. "The important idea here is that this is a logical place for the market to find support and mount a rally. If its unable to then that’s very worrisome."

He calls this a "struggle day" following last week's more than 500 point plunge in the Dow Jones Industrial Average.

"The things that I am looking at all lie in the future," says Bollinger, who adds, "this is an important idea for people to understand. Yes, we are oversold, buy signals flashing, based on oversold condition. But it is the market’s behavior in the wake of being oversold that tells us more about its future course."

Bollinger says it will be very important to watch the next couple of days, and given the market's behavior in its oversold state Bollinger says "there is still an awful lot of selling to be accommodated This wave of selling isn’t done."

He also cautions that "some people think that technical signals are absolutes, that if you get a buy signal it's a buy signal. What's more important is that if you get a buy signal and don’t go up that becomes an important piece of bearish evidence."

The gloom on Wall Street has been palpable as measured buy technical indictors. An especially glaring example is the NYSE New Highs/New Lows indicator, which measures the difference between 52 week highs and lows on the Big Board. It fell to -754 Friday, a level not seen since 2004 and is hovering at the -400 level today.

Technicians also point to the Relative Strength Index, which compares the magnitude of recent losses and gains in a security. Against the Dow Industrials , it sank below the 40 mark on Friday indicating an "oversold" market condition.

Scott Fullman, director of investment strategy at IA Englander, says there were only about a dozen new highs on the Big Board on Friday, but despite the negative sentiment, "there isn't a rush to buy" as advancing stocks have been barely maintaining a lead over declining stocks today.

Fullman says that he would like to see a full fledged 10% "textbook correction" in the market. While that wouldn't bring the stock market back to its February lows it would be positive in his estimation because it would mark a "higher low on the stock charts".

Another well known technical strategist on Wall Street, Ralph Acampora, director of technical analysis at Knight Capital Group says the present market travails "don't look like February, it looks deeper than that because of the fear I see."

Stock markets around the globe tumbled in late February after a stock market crash in Shanghai.

Acampora says this has the feel of 1998 when the stock market plunged in August of that year as Long Term Capital Management unraveled and brought on a temporary meltdown in the credit markets. As a result, Acampora says the Dow could be "setting up for a test of its 200 day moving average."

The Dow's 200 day moving average is presently pegged at 12,755.

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