The Start of a Better Rally?

I had been looking for a climactic low to terminate this decline, but so far, it has failed to materialize. Typically, the volume would get heavy and the trading ranges would expand as the markets made a one- or a two-day reversal. Moreover, the Arms Index numbers would get large, thereby producing very oversold short-term moving averages. Also, the VIX would have a sudden spurt. None of these signs have yet appeared.

However, the action in the financials in the last two days makes one wonder if they have had their own capitulation. And further, the weakness in the oils looks as though they have turned lower. Could we be seeing selective capitulation? If so, it would be very unusual. But I see enough evidence of such action to suggest at least nibbling at some of the financials, taking profits on long positions in some of the oils, and even putting on some shorts.

If we are not at the start of a better rally, I think we are very close.

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Dow Jones Industrial Average

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Source: MetaStock

Arms Indices

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Source: MetaStock

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Genentech: Buy

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Source: MetaStock

The advance that began in Genentech (DNA - commentary - Cramer's Take) in late May looks as though it has further to go. It has again broken out above an important resistance level. Volume has been heavy on the upside.

If we look at the period since mid-April as a base-building phase, it would imply the rise has not yet expended all the volume in the base. After a pullback in the last few days, it has started to strengthen again. It looks as though it could be bought around current levels.

(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.)

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Eastman Kodak: Buy

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Source: MetaStock

Just last October, Eastman Kodak (EK - commentary - Cramer's Take) was trading at about $29 per share. Since then, it has dropped to about $12, and now rallied to the $14 area.

The upward move two weeks ago was on the biggest volume in many months, and has now been followed by a lighter-volume pullback. That pullback has taken the typical form of a flag. I would be inclined to put in a stop-buy order just above the upper limits of the flag, so that any resumption of strength would trigger a buy. If it doesn't rally, it doesn't get bought.

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Devon Energy: Short

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Source: MetaStock

The sudden drop in oil prices over the last two days has been reflected in a great number of the oil stocks. The break looks to me to be the beginning of a larger decline. It looks like a time to nail down profits in the group, and even put on some shorts.

Shown above is a typical example, Devon Energy (DVN - commentary - Cramer's Take). Even as oil prices were going higher, it had been moving sideways, and the break took it out of the bottom of the consolidation.

I would expect a little rallying on lighter volume, and then a continuation of the decline. Watch for the rally, and then go short.

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Grey Wolf: Short

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Source: MetaStock

Here is another oil that looks as though it is going lower. Actually, Grey Wolf (GW - commentary - Cramer's Take) started to go lower a couple of days before the break in the price of oil. Since then, it has rallied a little, and then shown renewed weakness, suggesting it would not be advisable to wait to put on the position.

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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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