In the last three days, the markets have butted up against a resistance level. In terms of the Dow, as we can see on the chart below, it has gone right to the highs of November and December. Should it be turned back here, and if a decline takes it through the lows of two weeks ago on increasing volume and a widening trading range, it would have the look of a head-and-shoulders pattern, and that would be worrisome.
However, the Arms Index numbers continue to be encouraging here. Even with the strength of last week, the daily numbers were not bullish enough to push the five-day and 10-day moving averages to overbought positions.
In addition, volume has been impressive on the upside. So the market appears to have enough underlying strength to overcome the resistance and move to the highs of January, and perhaps higher.
Until the Arms Index picks up some low daily numbers that push the moving averages to overbought positions, I am inclined to hold long positions, and even add to them.
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.
Still Encouraging The Arms Index five- and 10-day moving averages are not yet overbought
This is the second time in as many months that LSI Logic (LSI - commentary - Cramer's Take) has caught my attention as a buy. On Dec. 9, LSI Logic was starting to act better, with volume to the upside and an apparent move out of the downtrend. Since then it has continued higher and the volume has repeatedly come in when the stock moved higher, and dried up on pullbacks. Four days ago, it gapped to the upside and broke out above the prior resistance top. It could have another light-volume pullback, which would give us an opportunity to buy at a better level. I would be inclined to add to positions established in December or put on a new long if we get 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.)
A number of the medical equipment companies have started to act quite well recently, and look as though they are headed higher. Stryker (SYK - commentary - Cramer's Take) in particular has given us a very believable sign of strength, with the power box to the upside that showed up three days ago. It has pulled back just a little on lighter volume, and may need to do a little more over the next few days. I would be inclined to put on at least a partial position here, and maybe add to it if the pullback materializes.
I suggested PerkinElmer (PKI - commentary - Cramer's Take) as a buy on Oct. 19. I have indicated that buy point on the chart above. Now the uptrend has been broken and a quite wide top formation has developed. The downside volume three days ago and the wide trading range suggest it is headed lower. It looks like time to take profits on the long position and establish a short position.
After a good advance, Eli Lilly (LLY - commentary - Cramer's Take) looks as though it is turning to the downside. Tuesday it broke one key support level, and is very close to breaking another. The entire consolidation has the look of a head-and-shoulders pattern, with Tuesday being a break of the neckline. The two moving averages have crossed to the negative side. It appears to be a short around current levels.
P.S. Will you be there when Cramer makes his next move?
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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 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. 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. Richard appreciates your feedback; click here to send him an email. TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.
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