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By Dick Arms
RealMoney.com Contributor
5/16/2008 8:59 AM EDT
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The two outstanding features of the current market are low volume and slow upward progress. The lack of volume, which has been evident since March, is saying that there is no real enthusiasm for this advance. The slow progress tells us that here is a heavy overhead supply of stock, ready to be sold into rallies.
Notice on the Equivolume chart of the
Dow Industrials below that there was a heavy volume initial advance off the March low, but after that, the advance was unenthusiastic. It appears that we had a heavy-volume low in January, which tested on lighter volume in March, implying an upward leg was starting.
Since then the up leg has, indeed, developed, but it is disappointing. As we noted two days ago, on the S&P 500 chart we have had what looks like a bear-market rally, and it seems to be running out of energy.
The Arms Index is shown, in its various moving averages, on the second chart below. We have a neutral situation on the five-day and 10-day moving averages, saying that the current up move could carry further. The 21-day and the 55-day are saying that they are somewhat overbought, and that the intermediated-term direction is likely to turn down.
I continue to suggest staying with long positions, but having close stop orders, so as to not give back too much of the profits.
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.
Computer Science: Buy
That is sure a nice looking breakout on
Computer Science
(CSC)
. This comes after a very long sideways move lasting almost five months.
It is interesting that the support level from last August became a new resistance level this year. Now we have moved above it with increasing volume and a widening trading range, and then, in the last few days, backed off on lighter trading. The pullback has taken the form of a pennant.
I would like to buy the stock as soon as it resumes its advance, if it does. Therefore, a stop-buy order just above the top of the pennant seems like a valid strategy.
(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.)
Ann Taylor: Buy
Ann Taylor
(ANN)
is another stock that has moved above resistance in an impressive manner. The advance four days ago came after an upward gap, and had very good volume and a wide trading range. That qualifies it as a power
box, and implies more gains before long.
Since then, it has moved even higher, and shows little propensity to pull back, even though the markets have been somewhat indecisive. I would be inclined to buy at least part of a position here, without waiting for a pullback that may not materialize.
Constellation Brands: Buy
Lower highs and higher lows in
Constellation Brands
(STZ)
were showing us a standoff between buyers and sellers that would soon be resolved in one direction or the other. The likely move was implied earlier by the up volume on the advance in April.
Now we have gone out of the top of the triangle, with very impressive volume and a large trading range. It may be overdone on a short-term basis, so I would be inclined to hold back on buying, to see if it will pullback on lower volume, as is quite typical. Such a pullback would look like a buying opportunity.
Pioneer Drilling: Short
Pioneer Drilling
(PDC)
had a very good advance, about what might have been expected in relation to the width of the base that preceded it. Now, though, it has turned decisively lower. The two volume-adjusted moving-average lines that overlie the price plot, above, have crossed to the negative side, and so has the moving average convergence/divergence (MACD) across the top of the chart. The small rally of the last few days has been on lighter trading, and is giving us a chance to go short at a better level.
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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
Stop and Make Money: How to Profit in the Stock Market Using Volume and Stop Orders,
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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