Watch the Dow's Trend Line

The unyielding upward pressure of the last two weeks has taken the markets right up to the top of the longer-term uptrend that began in March. The first chart below shows that channel and our proximity to its upper limits. It seems apparent that the overbought condition will lead to a pullback, and likely a larger one than the last two down blips, but we've encountered a relentless underlying buying pressure on any sign of a pullback.

I have indicted an intermediate-term line that should be watched. A break of that level on a pullback would suggest that support was being overcome, and the decline could go further.

In the meantime, the expected move back toward overbought of the Arms Index moving averages has occurred. We now have neutral readings of the five-day and the 10-day metrics, and the longer-term moving averages continue to be quite overbought. It is the longer-term work, particularly, that suggests extreme caution at this time.

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Dow Jones Industrial Average Source: Metastock

Arms Index Source: Metastock

Gigamedia: Buy

Source: Metastock

Contrary to what one might expect in light of the market strength over the last two weeks, it has not been easy to find attractive stocks on the buy side in this market. Here, though, is an exception. Gigamedia (GIGM - commentary - Trade Now) quit going down in mid-August, built a base until two days ago, and then broke out. Volume became very heavy and the trading range expanded. The square Equivolume entry suggests a likely low-volume pullback before going higher. Therefore, I would not be in a hurry to buy and would like to wait for such a pullback.

(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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