Technical Analysis
This Rally Shows Some Promise
 By Dick Arms
RealMoney.com Contributor
3/26/2008 10:02 AM EDT
URL: http://www.thestreet.com/p/rmoney/technicalanalysis/10409301.html

On a very short-term basis, it looks as though the rally may have gone too far too fast. But that is not meant to denigrate the importance of the current rally. The move off the lows last week, in the face of immense pressure from the news front, shows just how oversold the markets had become.

Since then, in just four trading days, the Dow has tacked on about 600 points. But the five-day Arms Index numbers have gone into slightly overbought territory, and the 10-day is now quite neutral. After such an advance, a bit of a rest is to be expected.

Looking at the first chart below, we see that the advance has broken through the descending trend line going back to December. That supports the contention that the current rally is going to be better than others we have seen in the last few months. The Dow is now approaching the January and February highs, where some resistance is to be expected.

In the last two weeks, I have been suggesting going long or staying long. I am still of the opinion that the rally has a good deal further to go. Consequently, it is probably better, unless you are an extremely aggressive trader, to just hold through a resting or pullback phase here, rather than try to go out and come back in.

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.

Click here for larger image.
Source: MetaStock

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Source: MetaStock

Analog Devices: Buy

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Source: MetaStock

In the last few weeks, I have repeatedly suggested technology names, especially the biggest ones, as possible buys. Almost all have been acting much better. Here is another one that has started to look very attractive.

Analog Devices (ADI) spent the last three months in a base-building phase. When it did go up, volume was heavier, which was a good sign. Now it has broken out through the top of that zone. Volume increased nicely, as did trading range, and it left a gap behind.

On Tuesday, it appeared to be resting, and I think it could pull back a bit more, but I would treat such a pullback as a buying opportunity.

(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

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Source: MetaStock

On Feb. 13, Cabela's (CAB) was suggested as a buy. With the markets in general sliding since then, it has held well and has now found new strength.

The moving average convergence/divergence (MACD) across the top of the chart has just crossed to the positive side again, and the two volume-adjusted moving-average lines have also gone positive. I like the way in which volume is tending to increase on advances.

It looks as though it could be bought around current levels. I would want to protect the position with a stop loss order below the low of last week.

Alcoa: Short

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Source: MetaStock

It looks like a good time to be going short Alcoa (AA) . It has again been turned back by the highs of last October, and volume has accelerated to the downside. It broke the support level established earlier this month with heavier trading, a widening trading range and a gap. A little more rallying in the next few days is to be expected. Such a rally, if on lighter trading, would look like an opportunity to put on a short position.

EOG Resources: Short

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Source: MetaStock

With the slowing of commodity prices in general, and oil in particular, it is time to reexamine positions in the oil and gas area. EOG Resources (EOG) has given strong signs it is headed lower. We have the high-volume climactic top, followed by the typical low-volume test of the level, and then the sign of weakness. Now it has rallied, but on disappointing volume. It looks as though the stock is headed lower and could be shorted around current levels.

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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