Uptrend Hangs by a Thread

The selling at the end of last week pushed the Arms Index moving averages to more oversold positions, suggesting a post-Christmas rally. On the first chart below, we see that the five-day and 10-day moving averages of the Arms Index are still oversold in spite of Tuesday's rally, indicating that the strength is likely to carry further.

But it is not the sort of extreme that would justify a big move.

The second chart compares the S&P 500 to the Nasdaq, going back to the lows of last summer. It shows the big difference that has recently developed between these two markets.

The S&P is still in the uptrend, albeit very close to a penetration of the bottom trendline. The Nasdaq, on the other hand, has already crossed the uptrend line, which indicates that it has entered a sideways consolidation.

A move below last month's lows would suggest the start of a downtrend.

So, as we have been noting repeatedly recently, the uptrend is still with us, at least in some of the averages, but it would take very little to change the picture to one of a downtrend.

I would look for the rally that started Tuesday to carry a little further, but I can't get enthusiastic about it on a longer-term basis.

---

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.

---

Oversold, but Not Extreme Strength will carry somewhat further

Click here for larger image.

Source: Metastock

---

Big Difference The S&P 500 vs. the Nasdaq

Click here for larger image.

Source: Metastock

---

Baker Hughes: Buy

Click here for larger image.

Source: Metastock

Often an old level of support becomes a new area of resistance. Such was the case in Baker Hughes (BHI - commentary - Cramer's Take), which was held up by the $75 level in June and July and then stopped by the same level in October. But now Baker Hughes has broken out through that price with heavier trading, and had a light-volume pullback. Also encouraging is the series of higher lows. The stock appears to be poised to move higher from here. (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.)

---

Joy Global: Buy

Click here for larger image.

Source: Metastock

Mining equipment manufacturer Joy Global (JOYG - commentary - Cramer's Take) is coming out of a very wide base. In August it gave us the first sign of strength as it moved up out of the downtrend on heavy volume. That led to a long period of indecisive trading, but that now appears to have been resolved to the upside. Last week it pushed through the top of the consolidation with much heavier trading, and it has now pulled back a little on lighter volume, presenting an opportunity to buy at a better level.

---

J.M. Smucker: Short

Click here for larger image.

Source: Metastock

Volume appears to have swung to the sell side of J.M. Smucker (SJM - commentary - Cramer's Take) in the last few weeks. It had been in a rising up channel with volume coming in on each advance and drying up on each decline. But now it looks as though the volume emphasis has changed. It broke through the ascending bottom trendline, and now has gone back up on much lighter volume. It looks ready to move lower, and could be sold short around current levels.

---

American Oriental Bioengineering: Short

Click here for larger image.

Source: Metastock

Shares of Chinese prescription drug company American Oriental Bioengineering (AOB - commentary - Cramer's Take) have moved from less a dollar a share a couple of years ago to more than $13 recently. The break-in price last week was on heavy trading, and brought about a penetration of the ascending trendline. The MACD across the top of the chart has crossed to the negative side, and so have the two volume-adjusted moving averages that overlie the prices. It looks as though AOB's long advance has been halted, and there could be a profitable decline from here.

---

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.