Technical Analysis
It May Be Time to Get Long
 By Dick Arms
RealMoney.com Contributor
2/13/2008 6:38 AM EST
URL: http://www.thestreet.com/p/rmoney/technicalanalysis/10403192.html

The rally of the last two days is extremely encouraging. It looks as though we have seen the lighter-volume test of the climax lows we were looking for and successfully bounced higher. That suggests we are going to see this advance go further.

Toward the end of last week, I wrote that I was on the sidelines, watching to see what was going to happen. I wanted to let the market tell its story. I like what it has told us so far. This action is encouraging enough to suggest having some long positions in order to participate in an advance that appears ready to go further.

By last weekend, the Arms Index had become somewhat oversold, also pointing to a likely rally. The action since then has erased the oversold condition in the five-day, but the longer-term moving averages are still OK, and the five-day is only neutral.

I would be inclined to look for a bit more of a pullback after the strength of the last two days, and use such a pullback as an opportunity to put on some long positions.

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.

Test of Low Provides a Shot at the Upside
Click here for larger image.
Source: MetaStock

Click here for larger image.
Source: MetaStock

PetSmart: Buy

Click here for larger image.
Source: MetaStock

On the chart of PetSmart (PETM) , we see a rounding bottom that looks like a foundation for a substantial advance.

We had heavier volume in mid-January, as it appeared to wash out the last sellers after a long decline. After testing that low, it has worked higher and broken out above the prior level of resistance. Volume is tending to come in on the advances. I think it could be bought around current levels for a move back into the low $30s.

(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.)

Cabela's: Buy

Click here for larger image.
Source: MetaStock

Cabela's (CAB) was suggested as a short in May of last year when it was at almost twice its present price. Now the long slide appears to have ended, and an advance started. It has broken up through the descending trendline and has gone through two key resistance levels with better volume.

The moving average convergence/divergence (MACD) across the top of the chart has gone positive, and so have the two moving-average lines that overlie the price plot. This, and other stocks in the sporting-goods retailing business, are looking attractive. The pullback of the last week gives us an opportunity to buy it a little bit better price.

Teva Pharmaceutical: Short

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Source: MetaStock

Teva Pharmaceutical (TEVA) was last mentioned in this column as a buy on Feb. 21 of last year; just about a year ago. It did, indeed, have an impressive rise, but that now appears to be over. It accelerated to a new high in January, but then it put in a square entry on the top and turned down with heavier volume and wider trading ranges. It has broken the ascending trend line and then rallied again on light trading. This looks like a good time to put on a short position.

Humana: Short

Click here for larger image.
Source: MetaStock

Until just a month ago, every time the stock of Humana (HUM) moved higher, volume tended to get heavier, and the trading ranges tended to get larger. But now that appears to have changed.

Recently, the volume has been coming in on the declines, and the trading ranges have tended to become larger also. This change in character occurred as it gapped downward, forming what looked like a breakaway gap, and signaling a major change in the stock. It looks as though it is headed lower and could be shorted, especially on a lighter-volume rally.

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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