Watch Out for Breaks

The markets have now been in a very narrow trading band for about two weeks. As a result, they have established levels that can be easily labeled as support.

As long as they continue to hold above those levels, we are still in a sideways trading range. If, however, those levels are decisively penetrated, we'll need to consider the markets to be in a downward cycle. Therefore, these levels have become very important.

In terms of the Dow, the level to watch is 12,400, intraday. The critical level on the Nasdaq is just below 2400. On the S&P 500, a break below 1404 would be bothersome. The similar level on the Russell 2000 is 770.

Keep in mind, though, that it would need to be a break through the levels with heavier volume, and not a small penetration but a significant one.

In the meantime, with the markets going nowhere, the Arms Index numbers remain somewhat overbought. That suggests we could easily see some more downside.

Therefore, with the exception of a few groups that tend to be contra-cyclical, there seems to be little reason for buying. The exceptions are the golds and the oils, both of which I'll address below.

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Overbought The Arms Index numbers point to the possibility of more downside

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Source: Metastock

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Barrick Gold: Buy

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Source: Metastock

The price of gold appears to be starting to move higher again. It went slightly above a prior resistance level last week. It looks like time to acquire the gold stocks.

Barrick (ABX - commentary - Cramer's Take) has a strong support level, and has been getting better volume to the upside. The two volume-adjusted moving averages have just crossed to the positive side. I see it as a buy around current levels. (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.)

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Cheniere Energy: Buy

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Source: Metastock

Last week I suggested buying some energy stocks that looked as though they were ready to move higher. Since then we have had a big jump in the price of crude that has helped to push them higher. Cheniere Energy (LNG - commentary - Cramer's Take) is another stock in the category that still looks as though it has a long way to go on the upside. The wide base could justify a strong advance, and the upside volume recently is encouraging.

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Merrill Lynch: Take Profits and Short

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Source: Metastock

On Aug. 6, I suggested buying Merrill Lynch (MER - commentary - Cramer's Take). Now, after a long and steady advance, the stock is starting to hesitate. It has broken the uptrend channel bottom, and volume is becoming a little heavier on the downside. Also, the stock's moving averages have crossed to the downside. It looks like time to take profits on long positions, and aggressive traders may want to short the stock.

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Ryanair Holdings: Short

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Source: Metastock

Ryanair Holdings (RYAAY - commentary - Cramer's Take) is another stock that has had a long advance but now appears to be turning lower. It has doubled since last summer, with volume becoming heavier on each advance and drying up on each pullback. But the last pullback was on heavier volume than came in on any advance. The ascending trendline has been penetrated, and the stock has rallied slightly on much lighter volume. It looks like a short around current levels.

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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.

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