With the markets continuing to mark time in this period of ambivalence, let's take the opportunity to back off and consider the longer-term picture. Below is a chart of the S&P 500 going back to 1998, before the top of the secular bull market. I think it's apparent from this chart that we have had a bear market and then a bull market in the last six years. The two markets are of approximately the same duration, but the S&P hasn't gotten back up to its highs from 2000.
Notice the ascending trend line I have inserted. That line was broken by the last decline, which suggests a slowing of the advance. It begins to look as though the bull market has become a sideways market. A decisive break of the recent lows would imply we were entering a bear market. Of course, a break above the old highs would grant a reprieve, but we would still be late in an old bull market.
These longer-term considerations contribute to my continued reluctance to become a longer-term buyer. I'm willing to play the swings, but I'm happy to take shorter-term profits as they occur.
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.
The Long View A strong break of the recent lows would suggest a new bear market; a break above old highs would only be a reprieve
Convergys (CVG - commentary - Cramer's Take) has had a good advance over the last year, so it's not early in the game. However, the move upward Wednesday was very strong, taking it up through the highs that had been posing a problem since April. The volume and trading range increased, making it look like a legitimate breakout. A buy in here with a close following stop looks as though it could be profitable.
The breakout and upward move in Quiksilver (ZQK - commentary - Cramer's Take), shown above, may be a little too rapid to be sustainable without a pullback first. However, the move above resistance in the last few days appears to be the harbinger of better things ahead. The last two rallies have been on better volume, and out indicators have crossed to the plus side. I'm inclined to look for a light-volume pullback to the breakout level as an opportunity to go long.
The above chart of Holly (HOC - commentary - Cramer's Take) is typical of the sort of action we are seeing in the oil and gas sector. This one, though, is particularly noticeable because of the volume in the drop through support two days ago. It has the look, therefore, of a head-and-shoulders formation, with a penetration of the neckline. This is a bearish pattern that suggests we are going to see more downside. I see the stock as a short, especially on a lighter-volume partial retracement of the drop.
A somewhat different, but still cautionary picture, is presented by ConocoPhillips (COP - commentary - Cramer's Take). We have a clear break of an important support level, with increasing volume and a widening trading range. The MACD across the top of the chart has gone negative, and so have the pair of volume-adjusted moving average lines that overlie the prices. A return to the old support around $58 appears likely. The lower highs between April and August suggest that support might not hold either. Again, I would like to short into a light-volume rally.
P.S. Will you be there when Cramer makes his next move?
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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 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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