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On a short-term basis, the markets became quite overbought by the end of last week, so this pullback does not come as a surprise. But the crossover of the moving average convergence/divergence (MACD), as shown on the first chart below, is saying that we are likely to see more to the advance after a resting period.
On the second chart, the lower line -- the five-day Arms Index moving average -- is still overbought in spite of the weakness of the last two sessions. Yet the 10-day is neutral. The implication is that we are likely to see a further pullback, but of very limited duration and scope, before the advance resumes. Traders may want to take advantage of any further pulling back in order to pick up some long positions in the next few days. There should be room for a trade, even though it is still a downtrending market 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.
Fannie Mae: Buy
Two weeks ago, it seemed to have a final washout drop. It left a gap behind as it traded immense volume, but it also traded in a very square Equivolume box, suggesting it was encountering support. The entry had the look of a washout and an exhaustion gap. Since then, it has built a base and strengthened. Now it has pulled back a little on lighter volume. If you are not afraid to buck the news, the popular sentiment and the fears of the consensus, perhaps a buy in this stock should be considered. Particularly encouraging is the crossover in the MACD. The last time it crossed was in the other direction at the start of the drop. (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.) Fifth Third Bank: Buy
As we made the lows in the market almost two weeks ago, I was suggesting buying some of the Money Center Banks. They continue to look interesting, and now some of the Regional Banks are also looking as though they are trying to turn around. Shown above, Fifth Third Bank (FITB - commentary - Cramer's Take) may be worth a buy. The rise Tuesday was enough to break through the prior high, albeit just barely. But the descending trendline has been broken, and we are seeing volume coming in on advances. In that it started to pull back on lighter volume Tuesday, I would be inclined to watch and wait for a resumption of strength as a signal to buy. Whitney Holding: Buy
Here is another Regional Bank stock that might be considered for buying. Whitney Holding (WTNY - commentary - Cramer's Take) has been moving higher with good volume and has penetrated a key resistance level. The wide base suggests it could have a substantial advance, and it, too, backed off a little Tuesday with lighter volume. I would let it back off as much as it wants to and follow it down with a stop-buy order just above the top of the small flag that is forming. Then, when and if it turns higher, it gets bought. Las Vegas Sands: Short
Is it time to roll the dice with a short position on Las Vegas Sands (LVS - commentary - Cramer's Take)? The chart suggests it could be a good play. The long winning streak appeared to come to an end in early November, with a sudden drop on volume leaving a gap behind. Since then, it has moved laterally with the highs forming a resistance level right where support was seen earlier. The conservative way to go would be to play the support line, only selling when it gets broken with volume. A more aggressive trader might put on at least a partial short position here. The stop-loss protection should be above the resistance line.
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. 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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