Take Profits While We Wait and See

The chart below shows a comparison of the Dow, the S&P 500 and the Nasdaq over the last six months. I have inserted trend lines on all the averages that show the uptrend each has been in since July. This exercise makes clear that the Dow has done the best, the S&P second-best and the Nasdaq worst in recent trading.

More important: At first, just the Nasdaq had gone from an uptrend to a sideways consolidation. But now all three major indices tell the same story.

Ever since the big reversal day a week ago, the markets have been very hesitant. But they have not yet told us they are going down, only that they have stopped going up.

I'm watching the Nasdaq in particular, because it seems to lead the way. If it should break the support just below 2400, where it has held four times since late November, it would suggest we're entering a down phase for at least the Nasdaq but probably also for the markets in general.

In the meantime, the Arms Index moving averages were oversold enough by last weekend to suggest a small rally. Now we've had that small rally, and the numbers have swung back to a more neutral position.

It's a "wait and see" market, in my opinion. I'm willing to take profits in longs but not yet ready to go aggressively to the short side.

---

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 Same Story All three major indices seem to be hesitating and definitely aren't rising

Click here for larger image.

Source: Metastock

---

Tenet Healthcare: Buy

Click here for larger image.

Source: Metastock

Before the beginning of November, we saw volume come in on declines in Tenet Healthcare (THC - commentary - Cramer's Take). Since then, the volume emphasis has reversed, with heavier volume on up days.

Last week Tenet broke its descending trend line but was turned back at the top of its trading range. However, with the moving averages crossing to the plus side and the MACD doing the same, Tenet appears headed higher.

I'd be inclined to put on a partial position around this level and then round out the position when and if it breaks out above that resistance that turned it back. (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.)

---

Alltel: Buy

Click here for larger image.

Source: Metastock

After spending the last half of 2006 in a consolidation, Alltel (AT - commentary - Cramer's Take) has suddenly moved sharply higher. It has broken out through the top of the consolidation and has done so with very heavy volume. The stock even left a gap behind, which would be classified as a breakaway gap. Alltel hasn't yet pulled back, which is often the pattern, so I'd be inclined to wait and see if it can drop back on light volume. The level I have indicated as the old resistance level looks like an attractive buy point.

---

Macrovision: Short

Click here for larger image.

Source: Metastock

Macrovision (MVSN - commentary - Cramer's Take) had a long and strong up move, but now that move appears to have ended. After doubling last year, the stock's volume has come in on the downside for the first time in many months. Macrovision has broken through both the ascending trendline and the last prior level of support. The two volume-adjusted moving averages have crossed to the negative side in the last few days, and so has the MACD. It looks early in Macrovision's decline, and the drop isn't overdone, so I'd consider shorting around current levels.

---

Omnicom: Short

Click here for larger image.

Source: Metastock

Omnicom (OMC - commentary - Cramer's Take) ran into resistance in December, as evidenced by the very square Equivolume entry, which has now emerged as a top. Last Wednesday the stock broke down with increasing volume and a widening trading range. It also broke the ascending trend line and the prior support level. That makes a power box to the downside and suggests Omnicom is headed lower. The small rally in this stock since then gives us the chance to sell at a better level.

---

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.