July 11 (Bloomberg) -- Louise Yamada, managing director of Louise Yamada Technical Research Advisors LLC, talked with Bloomberg's Tom Keene from New York yesterday about the outlook for U.S. stocks, oil prices and the use of technical analysis as an investment strategy.

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

TOM KEENE, HOST 'ON THE ECONOMY', BLOOMBERG NEWS: Miss Yamada, welcome to the program.

LOUISE YAMADA, MANAGING DIRECTOR, LOUISE YAMADA TECHNICAL RESEARCH ADVISORS LLC: Thank you, Tom. It's a pleasure.

KEENE: Had to finally get you on, folks, Louise Yamada, studying for years with the august Alan Shaw at Citigroup Smith Barney, and now out with Louise Yamada Technical Research Advisors.

Louise, too much to talk about here. Have you ever seen technical charts in the financial group as we see with the indices, as we see with Freddie Mac, Fannie Mae, as we see with Wachovia? Are these a different kind of chart?

YAMADA: Yes, I think that we are seeing very major structural breakdowns taking place. In some cases, one could argue that the distribution that's taken place - post this 2007 rally - has really been a double top versus the 2000 peak that was made in the financials. Many of them never really got above the 2000 level.

So there's been almost a secondary distribution for a lot of these names. And I think then you're defining six- to seven-year tops. And it's certainly much larger and much greater negative implications to anything that happened in 1998 or even in the 1990 period.

KEENE: You have, Louise Yamada, an extrapolation of a line, folks. And the way to do this on radio is first, everyone has to wear their seatbelt this hour. But you've got a trend before the Internet boom. And then up we go. And we come back down to the carnage of '01 and '02. And then up we go again, and that's your double top. And we come back down.

You're suggesting that we could see the S&P - not just the financials - but the S&P itself revisit the trend that was pre-Internet. Do I have that right?

YAMADA: Yes. Yes, that is a possibility. We don't have that target out there at the moment. We're looking more- we've seen the S&P already achieve our first downside target at 1250. We have another one out there at 1175. But what you're looking at suggests that if the deterioration continues, that the ultimate downside - or maybe not even the final - but the first trend line comes into play around 1000.

KEENE: If you're just joining us now, Louise Yamada of Louise Yamada Technical Research. Certainly one of the forces in technical analysis for any number of decades.

To give you an indication, folks, those of you that are in the business, Louise, the e-mails are already coming in to me from Bloomberg pros, the fact that you're on the show and we're talking to the group.

Let's talk these financials and continue with this, Louise, as we can. Is it appropriate now to really focus on the financials, or should we really focus on the larger indices and the aggregate?

YAMADA: Well I think we have to do both. It's just a question of the sequence of the deterioration, which really began back when we identified tops in the homebuilders in late 2005. And then started to see similar distribution coming to play in some of the financial sectors, 2006.

And by early 2007, you really had the relative-strength negative divergences in place, which means that the relative behavior of the financials was indicating that there was a weakening trend, and that profits were being taken into the rally.

KEENE: When you look at, on the other side, of the safe haven of utilities - and I think I quoted it on radio yesterday, folks, actually up a little bit here. Help us with this idea of relative to the major index, the relative strength of something like utilities. They've been pretty good, haven't they?

YAMADA: Utilities have been very offensive throughout this period. And at the moment, they are providing some defensive haven. They are outperforming. Obviously if they don't go down very much and the financials go down to a great degree, the relative strengths of the utilities holds up quite nicely, and gives you an indication of going down less, at the very least.

KEENE: And in going down less, well in your ETF study from Louise Yamada Technical Research, there are no buys. There's a few holds. And of course there's tons of sells. Why should I worry about going down a little bit less if I'm long only, and just get out of the market? Why shouldn't I just go to cash?

YAMADA: We have no problem with cash whatsoever. And as a matter of fact, a lot of our methodology for money management is that you don't go into stocks so that you can underperform the market. You go into stocks because you perceive rewards.

So we keep a weekly buy, hold, avoid, sell list, which is all relative-strength based. And one could draw a line right down the center. And you don't want to own anything in the avoid and sell lists. You may want to own in the buy and hold list.

But in a declining market like this, we also respect the absolute price support breaks. And when those occur, we would also exit the areas that are outperforming by going down less. But if they're breaking critical support levels, there's no reason to continue to hold them.

KEENE: In just one minute here, Miss Yamada, tell us about the energy group. We've heard from any number of strategists, our Chris Nagi and his equity desk, we've heard the energies are not what they were six months ago. Is it time to exit the energy stocks?

YAMADA: Well, I think you're getting pullbacks because really energy and materials have been the outperforming leaders. They have been the leaders over the past five years, along with some of the industrials and the railroads, of course. And the utilities have done quite well.

And little by little, stock by stock, some of those leaders have started to go by the wayside, move into consolidation. And for the most part, I would say energy looks as though at the very least it's moving into another consolidation in terms of stocks.

Now as the support levels, critical support levels, begin to break, as they have on some of the weaker names, then you have to, stock by stock, start to protect your capital.

KEENE: Louise, why don't fundamentalists use charts more?

YAMADA: Well, it probably would help. Charts are another tool. We really have two tools for the market. You have a good fundamental analyst who can analyze a company. And then you have the good technical analyst that hopefully can guide you as to when the timing is right to buy it before it goes up, and/or contrarily sell it before it goes down. And -

KEENE: Go ahead, please. Continue.

YAMADA: Yes, well price, it's really the creed of the technician is in price there is knowledge, because the equity market is a discounting mechanism. It's more like a barometer than a thermometer, because there are always other people out there brighter than you or I. And price shows us what they are doing with their money.

Stocks generally top out when the business couldn't be better. And stocks bottom out when the business couldn't be worse.

KEENE: When you look at a chart, and I'm going to bring up Freddie Mac here, folks, which of course has been sport $8 today. Is charting about not what to do, but to tell you what not to do?

YAMADA: It does both, because if you think of any price cycle, it has a - there is a life price cycle for any commodity, for any stock, for any index, that begins at a low level, breaks out presumably over an extended rectangle of some sort consolidation, and initiates an up trend. And the up trend is defined by higher highs, followed by higher lows. And the higher lows are significant because they indicate that somebody's out there willing to buy without letting the price drop as far as it had.

Eventually you get into a period, after an extended decline, where price stops going up and starts to move sideways, or maybe even doesn't go to a new high. And that is an indication that somebody is starting to sell into those rallies, and preventing it from going higher.

And when you break below the level at which the prior low took place, that is an indication that you're moving into aggressive supply. The up trend represents aggressive demand, and the breakdown and the down trend represents aggressive supply. People selling into rallies.

KEENE: You were a must-listen every morning at Smith Barney for years. And here I'm looking at the thirty day chart of Citigroup Smith Barney, owned by Citigroup, folks. And you've got this churning at the $17, $16 level. Okay, fine, we'll up, down, up, down, up, down, up, down. How do you know when to get into something like Citigroup that's cratered and has been level recently? When do you know to go long Citigroup?

YAMADA: Well whether it's Citigroup or Freddie Mac or Fannie Mae, what you have to recognize is that their price tend to have relationships. Patterns tend to have relationships to one another. The bigger the base, the higher the potential for a rise. And the bigger the top, or the distribution process, the greater the potential decline.

And the greater the decline, the longer the need for repair. You think about these breakdowns as if the steel- ball wrecker and crane came to your house. And it takes time before the carpenter, the plumber, the mason, the electrician can put it all back together.

So there is no indication of a time now to buy. Nor do we think you're going to want to do anything more than trade these stocks, probably for years to come.

KEENE: Oil is elegant. It is an elegant, elegant up chart. I remember when both of us were younger, Louise Yamada was preaching higher, higher, higher oil. Are you in the $200 oil camp, just here in twenty seconds?

YAMADA: Well, unfortunately we do have a statistical number out there. But oil has reached all of our targets from $67 to $80 to $100, and $125, and even $140.

KEENE: Where's your target right now?

YAMADA: Well I think you're probably going to get a little consolidation. But we have one little bit higher target at $150, as long as it holds above $120. But the thing has to consolidate at some point.

KEENE: Louise, we were talking about oil before the break. And I really think I've got to give it justice here. You suggested $140, that your next target's $150, and you'll look there. We need to go to $120 before you say sell. What do you use besides just lines on a piece of paper to give you technical indications of when to stay in oil or when to get out of oil?

YAMADA: Well, you do use some lines. We use trend lines. And the oil has been in a very fine up trend. If it were to come under $130, that trend would be somewhat violated. Not the long-term structural trend, but the short- term trend that it's had as it's moved from $100 to $140.

And if that were to happen, then the possibility of flipping back toward $120 exists. And $120 becomes a little bit more important support level.

Ideally one would like to see it simply back until here. I don't think we're going to see oil go back to the old lows by any means. Its historical evidence is that when we've had these multi-year step-ups in the price of oil, and this is only the third one since the 1940s, it tends not to move back to the old lows.

KEENE: And I think relative strength, most of my listeners have a feeling for. But look at these other things on the Bloomberg, Louise. Price Fibonacci graph, stochastics, market histograms. Sounds like a cough syrup. Bollinger Bands, point-and-figure charts - which you and I love - Welles Wilder's Directional Movement Indicator. On and on. Do you use all these other new fangled studies?

YAMADA: We use a few. We find the momentum indicator, which is probably the oscillator you referred to, the Moving Average Convergence Divergence, is a simple mathematical calculation of moving average of price, and then a moving average of the moving average. And that does give some very interesting signals, in the sense that if the price goes to a new high - as with relative strengths - and the momentum models have not followed, you are getting a sense that the momentum is slowing for that item, that stock, that commodity, even though it has moved to a slight new high.

And those negative divergences can, at the very least, suggest a period of consolidation ahead. If it's a daily indicator, it may be very short term. If you see it on a weekly indicator, it may be a little bit more intermediate term. If you see it on a monthly indicator, and you get a sell signal, you've got a structural warning that a bear market may be at hand. And that's something that we have had on the market indices since January.

KEENE: Well, when I look at some of these indicators, and I put to sleep today our Nick Baker and Michael Tsang, looking at the Directional Movement Indicator. It's got lots of pretty lines, folks. And red and green, and it gives you an asymmetric sense of the market. The latest carnage we've seen, Louise, is it about a lack of buyers, or is it about a lot of sellers?

YAMADA: I think it's a little bit of both because we do follow the Lowry data from Lowry Reports. And they have - their buying power is at a new low, which I think is the lowest low in history. It even goes beyond our alternate cycle, which is the 1930s, that we've been comparing 2000 forward to.

And the selling pressure is at a new high. And the spread is a record. So you clearly have a diminishment in buying overall and an increase in selling. And I think it has a lot to do with the financial crisis that's out there. And people are caught in the position where they can't sell what they want to sell, so they sell what they can.

And then you're getting an enormous deleveraging taking place under this market decline.

KEENE: This event we've had since August, and with your years of experience with Alan Shaw and others, Louise Yamada, is this an original territory we're in, or does this hearken back to other debacles we've had?

YAMADA: You mean the equity market itself? Well our -

KEENE: The equity market and also this credit crisis.

YAMADA: Well, I think it's very interesting that Elliot Wave's alternation of cycles suggests that any cycle in life should be less like the prior cycle and more like the alternate. And I rather think it's because people don't look back beyond one generation.

But we said in 2000, looking back, that our bear market experience should be less like the '66-to-'82 one, which took place in a horizontal pattern, but also with inflation and rising rates, and should be more like the alternate, which was 1929 to '42, which had deflationary pressures the way we've had, had a three year crash the way we've had, and had falling to low interest rates.

And our alternate hypothesis suggested that 2002 to 2007 could be very much like 1932 to '37. And it has followed to a tee. Not only that, but we are now getting the 47% decline that took place in 1937 in the very first area of financials. Whether or not the rest of the market has to follow that will take time to evolve.

KEENE: Well, it's a terrific historical perspective. Just in one minute here, Louise, when you look at all this, when you sum up the technical analysis right now, what do you look at first when you come in in the morning? When you come to your office in the morning in Manhattan, what do you look at first?

YAMADA: Well I look to see what futures are doing, in terms of what's happened abroad. And -

KEENE: Does it matter if we look at the futures, the S&P futures, in the morning?

YAMADA: Well in the morning, just to see what the sentiment is, I think, is what you might suggest about that.

KEENE: Is there a tipping point, like plus seven or minus seven?

YAMADA: No, no. You just like to see the general trend. Then the next thing I look at are all the indicators for the prior day. We look at the advanced decline data, the volume data, the new highs, new lows, and we have a particular up- down volume momentum study that we look at to see the proportion of up to down volume. And all of those have been oversold for a very long time. And contrary to what the traders feel, oversold is an opportunity to buy.

When you get into a bear market environment, oversolds can remain in place for quite a long time.

KEENE: Well, what's so special about point-and-figure charts?

YAMADA: Well point and figure, in the classical sense, which is not what Cohen did, but which we have done, and have done before me for forty years, which is to take every one-point intraday move in the stock and record it on a little piece of graph paper. And the reason that that is so helpful is because as the pattern evolves, the longer a flat pattern gets, the greater the evidence of distribution, and the greater the potential for the upside.

We then condense those one points into a three-point chart, which really gives you a big sense of the size of the accumulation or the distribution, and the long-term potential. We use the one point to get calculations of targets, as something breaks out. But I think that the three-points, drawn from the one-points, not the way it's done in many cases, but drawn from the one-points, give you a very different profile.

KEENE: And you see there, folks, a window. And to truly, how the pros use price change when they look at charts. When you look at all the point-and-figure charts, what's the one that gets you most excited now, whether it's the X-es going up or the O-es is going down?

YAMADA: For us its all X-es. We don't really use the O- es going down. But that doesn't matter. What's exciting is when you see a breakout from a very long horizontal pattern, the price moves above that horizontal pattern, because that indicates that somebody out there is willing to pay more to own the stock.

And we get very excited with a preservation of capital mode, when you have a very large frown in a price pattern that starts to come down, because that is the evidence that people are selling into strengths. And we want to get clients out before they lose their capital.

Remember, we only have two losses in our investment careers, the loss of opportunity or a loss of capital. And there will always be another opportunity. But if we lose the capital, then we can't come back.

KEENE: That sounds like John Templeton, the linkage here, folks, of Louise Yamada's technical analysis, certainly with what we've heard yesterday on the program on the fundamental work of John Templeton.

Louise, just one minute left here. Again, give us the idea right now fermenting with you and Jonathan Lin. What's the key idea from the Yamada workshop?

YAMADA: Well we've been very cautious on this market from the middle of 2007 when we began to see the deterioration in the technical indicators, showing that fewer and fewer stocks were taking the market up. And that's a classical piece of evidence four to six to nine months prior to a more substantial market decline.

I think that with the break of recent support levels, we are now in the throws of a market decline. And it pays to preserve capital.

KEENE: Louise Yamada, thank you so much. This is great, folks.

***END OF TRANSCRIPT***

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-0- Jul/11/2008 17:12 GMT

Last Updated: July 11, 2008 13:12 EDT