The Market Loves Its Round Numbers

It has been a week since the Dow, amid a huge amount of media attention, broke through the 10,000 level again. The popular conception is that such a move is likely to be a breakout, leading to a big advance.

But looking at history, it is apparent that round numbers tend to be price magnets. That is, the level becomes an attractor, with many swings above and below. The most extreme example is the 1000 level in the 1960s and '70s. Similarly, the 100 level was a strange attractor in the 1930s.

I am not implying many years in this area, but I am saying that round numbers tend to be a destination, not a waypoint. That is what we have seen in the last week. Yesterday we were again back into the 10,000 zone. It is apparently emerging as a level of difficulty in the advance that began in March. With the Arms Index numbers continuing to be overbought on a short-term basis, it does not look like a time to be aggressively buying.

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S&P 500 Equivolume

Arms Index Equivolume

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AGCO: Buy

Equivolume

AGCO (AGCO - commentary - Trade Now) has come off a base with increasing volume and a widening trading range. That move brought about a breakout above the top of the trading range, and also a penetration of the descending trendline. In addition, the MACD has crossed to the positive side. In view of the market I would not be in a great hurry to buy however. A pullback to the old descending trendline in the next few days looks very possible, and would present us with an opportunity to buy at a better level.

(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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