Last week, there was very unusual action in which the Arms Index numbers were quite bearish in spite of the strong averages. It looked as though there was a good deal of stealth selling coming in. That led to higher levels for the five-day Arms Index moving average. We see that on the inverted scale chart below.
The more overbought five-day set the stage for a short-term market rise, which is what got going Monday. As can be seen, the rise turned the index back away from quite oversold levels, but it wasn't enough to eliminate the condition. That suggests we are likely to see some more strength over the next few days.
On the other hand, the 10-day remains somewhat overbought and the 21-day is quite overbought. That reflects a market that appears to have gone too far too fast and is due for a pullback of intermediate-term dimensions. In other words, we could go a bit higher in the next few days, but a larger decline seems to be lurking just beyond that.
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.
Short-Term Strength, Midterm Pain The Arms Index MAs suggest an intermediate-term pullback is due
I suggested buying Barnes & Noble (BKS - commentary - Cramer's Take) Aug. 30 because it had had a powerful breakout and a lighter-volume pullback, and it was starting to strengthen again. Since then, the stock has continued to perform well. It has moved up through another key resistance level and looks as though it is headed higher. It is coming off a wide saucer base, suggesting it could take another pass at the highs of March.
Wild Oats (OATS - commentary - Cramer's Take) appears to have broken out above a resistance area. The advance Friday was accompanied by heavy volume and a wide trading range. Monday it settled back a little, making it look as though it could be bought around current levels. A return to the top of the large sideways area outlined by the two horizontal blue lines looks likely. A breakout above that level would be very encouraging for the longer term.
After a very impressive advance from June, Bank of New York (BK - commentary - Cramer's Take) appears to have turned decisively lower. Notice the crossovers on both the MACD and the two volume-adjusted moving averages (marked with blue ellipses). The ascending trend line has been broken, and volume has accelerated to the downside. I would expect some lighter-volume rallying before going lower, which would be an opportunity to put on a short position.
I suggested buying Benchmark Electronics (BHE - commentary - Cramer's Take) July 14. After a strong advance, it looks as though it is turning down. The two moving averages have crossed over to the sell side and so has the MACD. The ascending trend line has been broken with heavy volume and a wide trading range. I'd suggest that those who bought in July should take profits, and it could be considered as a candidate to go short at this time.
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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