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By Dick Arms
RealMoney.com Contributor
11/21/2007 7:59 AM EST
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Going into last Friday's market, it
looked as though the rally that had seemed so strong on Tuesday had already quit and that the decline was likely to resume. Not only has that decline resumed, it has penetrated two important lines.
One is the support of two weeks ago. The other is the ascending trend line that goes back to July 2006. The latter is the more important in that it suggests we could now drop to the ascending trend line that goes back to the start of the bull market five years ago. That line is around 12,300 but ascending.
Tuesday's activity was particularly disconcerting; a gain on the
Dow of 100 points was later given up and even turned into a loss of more than 100 points at one time. But the final upward move, regaining it all, suggests a market that is trying to stage a rally.
So we have a market that is in an intermediate-term decline but is in need of a relief rally. I'd expect to see more upside in the next few sessions.
The Arms Index moving averages were oversold a week ago, moved to somewhat overbought by week's end and now are quite close to neutral. There is room for the rally suggested above. Traders may want to try to capitalize on such a rally, but it's not a time for longer-term buying, in my opinion.
To view a larger version of these charts (in some browsers), after clicking on the "larger image" link below the chart, mouse over the lower-right area of the chart until the icon with four arrows appears. Then click on that icon.
Citigroup: Buy
Often it pays to buy stocks when nobody wants them.
Citigroup
(C)
certainly falls into that category, having been put on every major firm's sell list. But its chart suggests that those firms may be very late on the call.
The stock seemed to make a heavy-volume low nine trading days ago. A brief rally has ended, and we have returned to the old support. But the lower volume makes it look like a climax and a test.
I am particularly interested in two facts: The descending trendline has been penetrated and the
MACD is just about to go positive. I believe the selling has been overdone and think this stock could be bought. (To do my Equivolume charting, as in the charts that appear in this column, I use a charting program called
MetaStock. To learn more about this method, read my series of columns,
Trading With Equivolume.)
E*Trade: Buy
Were the above chart a bar chart rather than an Equivolume chart, I'd say this stock was still in a downtrend. But the volume postings have pushed the entries laterally to the extent that we have a penetration of the descending trendline. That suggests that an upturn in this stock is imminent.
Also, we had a gap and a very square entry that looked like a selling climax and an exhaustion gap. Now we have tested the support on lower volume. This is a lower-priced fast mover, but it looks as though there could be a nice profit in a long position at this time.
Apple: Short
Look at the recent track record for crossovers of MACD, indicated by ellipses on
Apple's
(AAPL)
chart. We are now again in the downward mode. Two weeks ago, the Equivolume plot decisively broke the ascending trendline with heavy volume and a wide trading range. That reverses an uptrend in which the price has doubled in just a few months. The rally since then appears to be giving us the opportunity to go short at a more attractive level.
Oracle: Short
Oracle
(ORCL)
is another of the big-name technology names that suddenly turned decisively south two weeks ago. It broke both the shorter- and the longer-term uptrend lines.
The lighter-volume rally in the last few days doesn't look sustainable. A way to play this potential short would be to put in a stop sell order just below the bottom of the small uptrend of the last few sessions. If it's broken, you're in; if the stock continues to rally, you're not.
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At time of publication, Arms had no positions in the stocks mentioned.
Richard Arms is a renowned stock market technician who invented the Arms Index (often referred to as the TRIN), which has become a mainstay of market analysis, appearing in
The Wall Street Journal and
Barron's. Arms also developed the widely used technical method Equivolume Charting. Since 1996, he has been publishing the Arms Advisory newsletter for money managers and financial institutions. He also has authored
Profits in Volume,
Volume Cycles in the Stock Market,
Trading Without Fear and
The Arms Index, and has been honored with the Market Technicians' Award for Lifetime Contribution to Technical Analysis. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Richard appreciates your feedback;
click here to send him an email.
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