“I’m terribly confused,” Cherry Kennels writes. “I just finished reading your column (last Friday’s), which painted a very bullish picture of the stock market based on liquidity trends. My broker, however, tells me that the market is not looking good technically. He tried explaining it to me, but it was too complicated. I couldn’t understand it. Is he right? Why two such opposing market views? I would also like to know what you think of the market technically. If you decide to respond, could you please do so in language I can understand.”

First, Ms. Kennels is talking about two entirely different market barometers. Liquidity is predicated on the amount of funds — or the lack of them — that are available for the purchase of common stocks. Technical strategy, on the other hand, is largely determined through analysis of the chart patterns of market indices and individual stocks.

Interestingly, the technical research team of Merrill Lynch recently completed a lengthy analysis of the market that echoes your broker’s thinking. It’s findings, which it fired off to institutional clients, make for unhappy reading, which is a far cry from the generally bullish sentiment prevalent on Wall Street. Or, summing up Merrill’s technical assessment of the market in a single word: Ugh!

Why so? For starters, the rally that has followed the 8% market correction between May and the July lows is on weak legs. Indicative of this, Merrill points out:

• Fewer and fewer stocks are hitting new 52-week highs, which is a sign of narrowing market breadth.

• Volume is greater on down days than on up days, which indicates lack of demand for stocks.

• The commodity sector leadership is losing momentum. Commodities, in fact, are showing bearish divergences, suggesting we’re likely to see a cyclical correction in the next few months before they resume their long-term bull trend.

• Most market cycles last 3 to 3 1/2 years, and we are fast approaching the fourth year of the bull move up from the lows of October 2002.

These are all signs of an aging bull market, Merrill points out. In addition, it notes, fall is a seasonally weak period for the market. Combine all these factors, says Merrill, with the midterm election cycle that typically has a peak-trough correction of 18%, and it is a recipe for a market decline.

Unfortunately, a sizable market decline — 15% to 20% in the S&P 500 — is precisely what Merrill’s technical staff expects. It notes that a normal market retracement would be one-third to one-half of the up move from the lows of October 2002, which would suggest declines of 15% to 20% for the S&P 500 and 25% to 30% for Nasdaq. Five stocks Merrill rates as especially vulnerable technically are Halliburton, Coach, Yahoo, Nike, and Steel Dynamics.

As they look to the fall, Merrill’s technical analysts express a number of concerns. Chief among them:

• The percentage of industry groups now below their 10- and 30-day moving averages continues to increase and currently stands at 63 (up from 50) out of 100 groups.

• There is more selling pressure than buying power.

• The Chinese and cyclically sensitive Japanese and Korean markets appear to have formed intermediate tops.

• The hedge fund de-leveraging process may not have been completed, with American hedge funds still net long the market and short volatility (a reference to the VIX Index, which measures volatility, based on the premiums in option prices).

• The level of global mergers and acquisitions activity is near the levels last seen in 2000 (a period of intense international M&A deals). This is a speculative indicator as most heavy M&A periods take place near market tops.

• Leadership sectors, notably energy, industrials, and materials, have negative divergent price momentum (meaning the stocks are going up, while the rate of price increases is slowing). Essentially, it’s an early market warning that danger lies ahead.

In another market-related matter, Merrill strategist Nigel Tupper notes that his global profit indicators have turned negative, a development that’s occurring at the same time global monetary policy is tightening.

So the bottom line from Merrill’s technical team, is a cautious stance as they move into the fall months. Warning that the markets may have already entered the correction phase and that only brief rallies will take place, likewise, that September is seasonally one of the worst months of the year, the Merrill analysts recommend investors shift portfolios more defensively and/or raise cash on rallies.

“We do expect better buying opportunities in October,” they say.