Posted on 02/05/2004 5:01:01 PM PST by Orangedog
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A Concise Technical Analysis (Nasdaq Technical Analysis Follows)
Remember the Last Technology Top? Strolling down memory lane from October 99 to the March of 2000 top, lets look at the NASDAQ composite versus the major drug stocks Merck (MRK), Pfizer (PFE), and Johnson & Johnson (JNJ). At almost the exact moment when the NASDAQ topped, the drug stocks bottomed. What happened after that? As shown in the chart below, the major drug stocks rallied, while the technology stocks dropped precipitously. When the NASDAQ failed over the next year, dropping 45%, the major drug stocks gained from 28 to 45%. Ten thousand dollars invested in the NASDAQ at the top would dwindle to $6,500 a year later. The same $10,000 invested in Pfizer would have grown to $14,500. This time around, the drug stocks appear to already have bottomed. Pfizer bottomed in August, Johnson & Johnson and Merck bottomed in November. This time the bottoms for the drug sector were at similar stock values (in US dollars) as at the March 2000 technology top. Generally, earnings have grown for these companies but the stocks are at similar levels as they were then. Strength in Drugs Johnson & Johnson Below is a two-year daily chart of Johnson & Johnson. The stock bottomed in November 2003 on the news of stent problems. There is always some calamity that befalls JNJ at the bottom. I cant remember what happened in July of 02. It must have been some horrible thing that scared out weak hands. Somebody really needed to sell those JNJ shares at 42 real badly! The most recent downtrend for JNJ beginning in April 2003, (one month after the beginning of the war rally in technology), has been broken. JNJ is now in an uptrend. Pfizer As shown in the weekly 3-year chart below, similar to Johnson & Johnson, Pfizer has broken a linear downtrend. It now appears to be heading up. Note the classic 2-bar reversal that occurred in July of 2002 (see Technical Analysis Explained, by Pring 4th edition, page 122). That would have been an excellent and low risk entry point. Pfizer can now probably be bought on pullbacks to its recent trendline. Merck The one-year daily chart of Merck below shows a clear and linear downtrend that was decisively broken. Note the tremendous volume on horrible news (cant quite remember what the news was now but I do remember that it was all you heard on Bloomberg radio that day!). What things reported on the radio were horrible for Merck, the daily MACD histogram was saying something completely different. The daily histogram put out higher low, telling sharp technical analysts, that it was smart to buy the stock and place a stop loss at the bottom that was made on the horrific news. As you can see by now, there is a reliable behavior pattern with the large drug stocks. That is the final capitulation day following long downtrends occurring on bad news reported in the media. The volume on these events is much larger than all other days. It would probably be a good idea to put these signs on your watch list, once you identify a large cap drug stock that is in an extended downtrend. A capitulation day is probably a good day to buy the stock for trading and/or investing purposes (with a stop loss). Weakness in Technology Intel Below is a one-year daily chart of Intel. It shows a clear breaking of a long-term uptrend. Intel could bounce; but the intermediate prognosis of Intels chart is not good. Microsoft The one-year daily chart of Microsoft below shows a clear head and shoulders pattern forming. Its notable that the MACD histogram plunged below the zero line at the head formation. During formation of the right shoulder, the MACD histogram barely made it above the zero line. The intermediate pattern is bearish. Dell The one-year daily chart of Dell shows a broken uptrend, and a clear topping pattern. The chart of Dell is showing lower highs and lower lows. (For you fundamentalists out there, Dell has a P/E of 35, not including stock options.) Oracle Oracle has traded manically for a while. There seems to be support at 11 and change, and resistance at 14. Oracle broke the resistance for a few days, but not decisively. It then went right back into its box. If it stays there as I think it will, then Oracle will be dead money at best for a while. Price objectives suggested by classical technical analysis in Pring, suggest that if it breaks below support, it will reach 8.5 or less. Similarly, a decisive break above the resistance at 14 would suggest a minimum upside price objective of 17, but I wouldnt hold my breath. Pring indicates that breakouts from trendlines that do not hold generally put traders holding the formerly broken out stock in a bad technical position (page 73). Often the technical position is worse after such breakouts. This is because breakouts that cannot hold indicate exhaustion, and exhaustion moves are often followed by strong price trends in the opposite direction to that indicated by the (false) breakout. Oracle at about $14 may seem cheap. Why is it so cheap? This is because Oracle management split the stock time after time during the 90s technology bubble. Oracle has a P/E of 30, and optimistic Wall Street analysts expect it to grow earnings at a 10% per year for the next 5 years. This is extremely expensive during any non-mania market time frame. Cisco Below is a one-year daily chart of Cisco. As with Oracle, Cisco has broken out of a support/resistance region, but quickly (after a few days) turned tail, and moved back into its channel. It sold off on its disappointing earnings and outlook, and broke below its channel line. If it doesnt reclaim the channel in about a week, then traders may begin to think about Ciscos P/E, and stock options policy. Disclosure: Martin owns shares of Johnson & Johnson and Pfizer. Around Thanksgiving week, I noted that the Nasdaq has formed a fan pattern. This classical technical analysis pattern is a method used to identify the end of a corrective (up) trend against a secular (down) trend. The standard rule is that when the third trend line is broken, the high has been seen. However although the pattern was identified accurately, the rule was broken at about New Years when Nasdaq broke above 2,000 decisively. At that time I noted that if the fan pattern had any remaining usefulness it would be if the third trend line (L-3) became a resistance line. As you can see from the chart below, trendline L-3 did in fact, become a resistance line. If Nasdaq 2,000 is broken decisively (say by 3%, and not reclaimed in a few days), then we may consider the fan pattern alive, and an indicator of the end of the Nasdaq bull run. Note also in the chart below, the apparent exhaustion move, as the Nasdaq broke out of the upper channel line, only to have the channel reclaimed in just a few days. Nasdaq entered back into its channel in a weak technical position, as it quickly sold off to the lower portion of the channel. Finally, consider the behavior of leading Nasdaq stocks after they reported their latest quarterly earnings: Cisco sold off. Yahoo sold off. Intel sold off. Amazon sold off. This is not a good sign. It is also behavior that was also shown by Nasdaq stocks near the March 2000, top. Dell and Oracle earnings reports are next. Why is all of this important? Because we can fiddle with charts all we want; but in the long run, valuations, dividends, and the definition of actual earnings do matter. Im using charts as a tool to help establish when the nonsense will end. When it does end, its a long way down. Theres opportunity there! Todays Market It was a weak rally today, fed (Fed?), by comments by Ben Bernanke. The aggressors in todays market were listening to Bernanke. Good luck with that! With the exception of Oracle, all of the technology generals were down today. Cisco is now at a critical juncture, since it is sitting below its support trendline. If it doesnt reclaim it soon, then Wall Street may be inclined to look at its market capitalization, stock option accounting, and long-term growth outlook. The general mood of the market has changed over the last 10 days or so. The Nasdaq is generally down on high volume, and up on light volume. Not a good sign. But there is opportunity there. Bonds went in the tank today (the 10-year was down 14/32). Gold was down marginally along with silver. But the gold bugs index (^HUI) was up 1.9%. The dollar was up on Bernankes comments. If he gives a speech every day, will that prop up the dollar? Just wondering. Your Opinion Matters e-mail your opinions and comments. I dont have a lot of time, but I answer most e-mail, and enjoy the feedback. Have a great evening! Martin Goldberg
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