We seem to be very near a point where a top should be expected. The chart below shows the Dow, posted through Monday. Notice the slowing of trading and the small trading range of the last entry. Tuesday was much the same. That suggests it is encountering overhead resistance.
Looking for a Top The Dow seems to be encountering overhead resistance.
Examine the vertical blue lines I have inserted. They mark the approximate locations of the prior tops this year. This being an Equivolume chart, they are very nearly equidistant on a volume basis, not a time basis. (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.)
The Arms Index numbers now have become quite overbought on a short-term basis. So there is good reason to look for a substantial pullback developing almost immediately.
I am impressed with the fact that the trend line going back to the start of this year has been penetrated to the upside. Also, the last low was not as low as might have been expected. If the coming decline can make a higher low instead of a lower low, it will be a very encouraging sign. But right now I am anxious to step aside and let the market tell me its story. Even if the recent rally does represent a change, I think we need a pullback in here.
In Gap (GPS - commentary - Cramer's Take), we have seen a very impressive move above a difficult resistance level. The breakout was with much heavier volume and a wide range, thereby producing an upside power box. The next day, though, it traded with heavy volume and a narrower range, suggesting it was encountering overhead supply. Logically, then, we might expect a lighter-volume pullback next. Such a pullback would, I believe, present us with an opportunity to buy a stock that has exhibited strength and wants to go higher but at a better level.
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 four books, including Profits in Volume and Trading Without Fear, and has been honored with the Market Technicians' Award for Lifetime Contribution to Technical Analysis. At the time of publication, he had no positions in stocks mentioned in this report, although holdings can change at any time. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks.
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