A War of Attrition By Dick Arms Special to TheStreet.com 5/14/01 8:26 AM ET

The blitzkrieg of April has become the trench warfare of May. It looked as though all resistance had toppled before the onslaught, as we came off the March 22 lows. The troops went charging forward and gained ground easily, but now the opposition has regrouped. It has slowed to a war of attrition.

Perhaps that should come as no surprise. No matter what market average we look at, the story is the same: It is at a level of historical significance, and a level at which at least a temporary halt is to be expected. The Dow Jones Industrial Average has entered the zone where it was turned back repeatedly, starting as far back as late 1999, and repeating throughout the past year and a half. It is the upper region of a sideways consolidation that has been with us ever since the secular bull market that began in 1982 ended in 1999. The Nasdaq is hitting against the level that served as support at year-end 2000. Old support levels are apt to become new resistance levels, as seems to be the case here. At about 1275, the S&P 500 encounters the highs of March, which are also the lows of December.

In the past two weeks, the Dow and the Nasdaq have both repeatedly thrown themselves against the ramparts, only to be repulsed. In the meantime, the trading ranges have become increasingly smaller. The volume has recently started to dry up some, but a great deal of effort is still being expended without penetrating the enemy lines. When we see volume without progress, it is almost always the sign of a top.

I follow an indicator, which I named the Yo-Yo index, that measures this. It now is saying that the effort-to-progress comparison is at a historic high. That is what we usually see at tops, and it carries a strong warning of an imminent pullback. Free copies of this chart, going back a number of years, can be requested at armsinsider.com.

In late March, the 10-day Arms Index (TRIN) said that we were seeing an important bottom. (The Arms Index shows the relationship between the number of stocks that increase in price and those that decrease, and the volume associated with those stocks.) So far, the action has been great, and the index has certainly proved to be accurate. But market bottoms are usually tested, and that may be what we are nearing. We don't need to go to or through the old lows to make a successful test, but we need to see a move toward the old lows on lighter volume.

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