Time to Take Profits

The press made the most of the DJIA over 10,000 action, but from a technical standpoint, the fact that the old high was broken is really more important.

Looking at the first chart below, we see that the breakout was not a powerful move. Volume was disappointingly low, and the advance was not on a big increase in trading range. Yesterday was particularly bothersome, with the trading range becoming extremely tight and the advance being unable to appreciably extend, producing a very square Equivolume entry, which carries the suggestion of heavy overhead resistance.

The second chart below is the really important one, I believe. The five-day and the 10-day moving averages of the Arms Index are at extremely overbought levels. In other words, in recent sessions, the volume has been so heavily concentrated in the advancing issues as to be unsustainable. Readings of this sort almost invariably lead to a decline. The Arms Index is saying that this is a time for taking profits on long positions, not a time for new buying.

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Dow Jones Industrial Average Metastock

Arms Index Metastock

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Conn's: Buy

Metastock

The upside gap in Conn's (CONN - commentary - Trade Now) yesterday, combined with an increase in volume and a widening trading range, give us what is called a power box on the Equivolume chart. The well-defined base from which the stock emerged is wide enough to tell us that the move is likely to go quite a bit further. Also, we have higher lows leading up to the advance, and we have a positive moving average convergence/divergence (MACD). Some pulling back would not be a surprise in here, and I would be inclined to watch for a light-volume return to the breakout level as a buying opportunity.

(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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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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