Reading the tea leaves, er, trend lines

You've heard the buzz words: Chernobyl, Paul Volcker, tax reform, oil prices, interest rates . . . . But as any ruler-toting technical analyst will tell you, that's all they are -- handy hot-air excuses for why stocks move.

A technical analyst will say that to divine the market's fickle ups and downs, you must follow the ``tape.'' You must track what was once a yellow snake of paper which now slithers across an electronic board as a stream of emerald figures on prices and trading volume.

Ah. Price. Volume. Now we're delving into idioms a technician considers significant.

This past week, trading volume was relatively light and prices gyrated wildly as the Friday expiration date of several stock-index futures and options drew nigh. By the closing bell, the Dow Jones industrial average had slipped to 1759.80, losing 29.63 points in five days.

A sloppy week with a southside bias doesn't bode well for the near term, analysts say.

``Low volume begets lower prices,'' says Charles S. Comer, a technical market strategist at Oppenheimer & Co. ``This less-than-dynamic activity leaves the market vulnerable.''

How vulnerable?

``I think we could retest the low end of the trading range -- in the neighborhood of 1,740 [on the Dow],'' Mr. Comer says.

That's about midway between where Alfred E. Goldman and Philip B. Erlanger say the Dow will settle. Mr. Goldman, director of technical market analysis at A. G. Edwards & Sons in St. Louis, sees support at 1,760 to 1,770, while Mr. Erlanger, who's with Advest in Hartford, Conn., thinks the Dow could slide as low as 1,710 to 1,730.

Looking out a few months from now, all three remain bullish. Goldman expects new highs by mid-June; Erlanger, by July. Comer justifies his optimism, in part, by looking at the trend line.

``Even drawing a trend line from September's lows,'' he says, ``the Dow would have to break below 1,680 to 1,700 before you could say the bull market is possibly over.''

A trend line connects the highest or lowest prices of a stock (or stocks) plotted on a chart over a period of time. The angle of the line, either up or down, indicates the trend. If prices fall or rise above the line, it indicates a new direction for the market.

But the optimism of these chartists is tempered by mixed signals and a perception that this bull must be reaching old age.

``Maybe we'll see one more swing on the upside -- smaller in points and quicker than in the past,'' Comer says. ``Or maybe we're in a pause where stocks that enjoyed big rises are correcting before new leadership emerges.''

Erlanger's view: ``We might get to 2,000 on the Dow, but that's not the move it was when the market was at 1,200.''

Investor sentiment is still too bullish for his tastes. According to the latest weekly survey by Investors Intelligence in Larchmont, N.Y., 50 percent of the investment advisers are bullish on stocks. That's down from a high of 68 percent April 1. Bears weigh in at 16 percent, and short-term bears and long-term bulls make up 34 percent.

To technicians, who see a herd mentality as signaling the end of a trend, a high bull count is bad. While the bulls are now thinning out, Erlanger says, ``there's a still a lot of risk in the market.''

Martin Zweig, who issues the Zweig Forecast, a New York-based newsletter, has his own sentiment gauge. He tracks ads placed in Barron's, a weekly investment newspaper.

``It reflects not only what advisers think about the market, but what they think the public will buy,'' Zweig says. ``It was pretty scary six or seven weeks ago -- too many bullish ads. Now it's neutral.''

Another common indicator that draws varying interpretations is the short-sales or short-interest data. Specifically, technicians look at the short-sales numbers on odd lots. Odd lots are smaller trades, and common wisdom is that if a large number of small investors are shorting stocks (guessing prices will fall), then that's a bullish sign. Again, technicians don't trust a herd, especially a herd of ``amateurs.''

``Historically, short sales have been a good contrary indicator. And in the last 10 days, odd-lot short sales have gone through the roof,'' says Comer at Oppenheimer. He notes that big jumps in short sales last occurred in October and January, just before rallies.

But since intermarket arbitrage is distorting data, Comer will only note this as ``a curious development.''

Erlanger says that by filtering out the arbitrage (which some analysts say cannot be accurately done), short interest is ``at fairly light levels.''

Such arbitrage static in the data has exasperated Goldman at A. G. Edwards. ``I don't take any one or all of my technical indicators seriously now.'' He adds, ``Too many people follow the same indicators. . . . Their usefulness has deteriorated.''

He cites high levels of institutional cash six months ago. This should have indicated that ``we were in trouble.'' Instead, a huge rally followed. And he points to the sentiment indicators showing large numbers of bulls from the last three months -- ``yet the market has done very well.''

Still, Goldman concedes that ``my technical indicators are starting to improve, even though I don't take them seriously.''

Specifically, which industries are giving a technical buy or sell signal?

Well, that depends on how you interpret the charts. Goldman sees interest-sensitive stocks (brokers, insurance, financial services) as ``weak but getting to support levels.'' Erlanger calls them ``weak.'' Comer describes interest-sensitive stocks (including home builders) as ``topping out.'' Comer also includes forest products in the topping-out group. But Goldman puts forest products in his group of ``strengthening'' issues. Also on his strengthening list: casinos, hotels, motels, restaurants, semiconductors, and secondary high-tech stocks.