Bullish Indicators Still in Effect

That was a very encouraging end to a very bad year. Actually, ever since the October low, we have been in a base-building process. If we look at the entire period, it looks like a big inverse head and shoulders. The move of the last few days has been on light volume, partially because of the holidays, but still it has been a good showing.

Note particularly, on the first chart below, the small flag that had been forming and that was penetrated to the upside in the last two days. This is one of the most reliable bullish indicators, suggesting we are going to move higher.

The second chart shows the shorter-term moving averages of the Arms Index. Because of the recent strength, the lower line, the five-day, has become a bit overbought, but the upper line, the 10-day, remains oversold. The implication is that the rally may have gone a bit too far too rapidly, but that we are headed higher after some hesitation.

The technical picture continues to indicate a higher market down the road. The wide base suggests a lasting move and a better market to start off the coming year. Having turned bullish in mid-October, I see no reason to change that outlook for now.

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To view a larger version of these charts (in some browsers), after clicking on the "larger image" link below the chart, mouse over the lower-right area of the chart until the icon with four arrows appears. Then click on that icon.

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Dow Industrials Metastock

Arms Index Metastock

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IBM: Buy

Metastock

The recent pulling back in IBM (IBM - commentary - Cramer's Take) makes it look as though we may be seeing the right shoulder of a head-and-shoulders bottom. That would suggest a substantial advance down the road. I like the pattern of higher lows and higher highs over the last month, and also the heavier volume coming in on up days. It had a small downward sloping pullback flag in the last week, which has now apparently been resolved to the upside. The stock looks like a buy around this level.

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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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