Monday Gave Us a Convincing Breakout

The dramatic reversal on Friday, in which a 250-Dow-point loss was transformed into a similar gain, said a great deal about a change in mood on Wall Street. For the first time in months, bad news was ignored. I see that as a result of the washout the prior Monday in which we saw a rush for the exits, producing the second-highest Arms Index reading in history.

After Friday's turn, the strength then carried well into Monday, and it was apparent that volume was higher on the upside than it had been of the prior days when the market went down.

The decline yesterday took away the gain of the previous day, but as you will see on the first chart below, the strength on Monday was enough to produce a very important breakout. We now have a series of higher highs and higher lows, which is a bullish indication.

The very high number on the Arms Index has been eliminated now from the five-day moving average, leading to the wild swings on the chart. The longer-term moving averages still contain the number and remain very oversold. The implication is that we are likely to see more hesitation in the next few days, but we have had a very important upturn that should eventually take us higher.

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Dow Industrials

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Source: MetaStock

Arms Index

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Source: MetaStock

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AT&T: Buy

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Source: MetaStock

We have talked repeatedly in the past about this stock, but it is such a big name, and the chart looks so good, that it needs to be mentioned again. AT&T (T - commentary - Cramer's Take) was suggested as a buy on Nov. 19, as it dipped back down toward support. Since then it has rallied well, and two days ago it moved through a very important resistance level. It has formed a wide base with ascending bottoms ever since the washout October low. If it was not bought in November, it does not look to be too late to do so now.

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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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