Treat Rallies as Sell Opportunities

The market action continues to be disappointing. The attempt to put a rally together this week failed again Wednesday, with a gain of more than 100 points on the Dow turning into a loss for the day of more than 30 points.

Going into the week, we were looking at a slightly more hopeful situation. Finally, on Friday and Monday, we had seen high enough daily Arms Index numbers to swing the shorter-term five-day and 10-day moving averages into somewhat oversold positions, so some rallying was to be anticipated. But what ensued was short-lived.

Notice the lack of volume on this daily-based Equivolume chart of the Dow, on both the rally and the low that preceded it. (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.) It is going to take a much heavier washout low to give the market a point at which to build a more substantial rally. Then, when the rally starts, it should be on heavy trading, showing us there is some conviction to the buying.

Lack of Volume Both the Dow's rally and its preceding low were too thin to build on

Source: Metastock

A great deal of technical damage was done this Monday, May 10, when the bottom of the consolidation going back to December was decisively broken. What had been a sideways consolidation now has become a downward pattern. To expect it to end this soon and this easily is perhaps overly optimistic. Now that we have started down, it is going to take more dramatic action to stop the slide. For now, it still looks as though rallies should be treated as selling opportunities.

Deluxe

Deluxe (DLX:NYSE) Buy

Source: Metastock

Twice in the last two weeks, Deluxe (DLX - commentary - Cramer's Take) has produced enough upside volume to make it pop out as a strong stock on my search programs. It was suggested as a buy on May 6, but the suggestion seems to bear repeating at this time. We have seen, in both cases, increasing volume with a widening of the price range as it moved up through an important old level of resistance. It appears to be moving out of a consolidation area that has formed over the last eight months. Deluxe's return to the levels it traded at about a year ago seems likely.

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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 four books, including Profits in Volume and Trading Without Fear, and has been honored with the Market Technicians' Award for Lifetime Contribution to Technical Analysis. At the time of publication, he had no positions in stocks mentioned in this report, although holdings can change at any time. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks.