It's Still Not Too Late for Longs

After the very strong rally of the last few days, Thursday's pullback was not only to be expected but was probably healthy. As can be seen on the second chart below, the five-day Arms Index moving average has moved back into overbought territory very quickly, in response to the strength.

It is saying that the market is entitled to a rest. But it is also encouraging to see that the 10-day is not overbought. It looks as though the rally has further to go and is just hesitating before doing so.

What we seem to have seen over the last few weeks has been a very heavy-volume climactic low, followed by a lighter-volume test of that low. We did not go all the way down to the prior low, but that is not required of a test. The most important factors are the lighter volume and the upturn.

It looks, based on this turn, as though the rally we are in will be able to go further. I do not think it is too late to put on speculative long positions to take advantage of this rally.

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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.

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Expected Pullback Should Lead to More Upside

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Source: MetaStock

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Source: MetaStock

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Boston Scientific: Buy

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Source: MetaStock

After a year-long decline, Boston Scientific (BSX - commentary - Cramer's Take) appears to be ending its slide. It is encouraging to see volume coming in on the advances and drying up on the pullbacks. A week ago, it broke out above an important prior resistance level. The volume and its trading range both expanded convincingly. Since then, it has pulled back in what looks like a small flag, and then started to strengthen again. This looks like a good time to be buying the stock. I would want to place my protective stop just below the low of late last week.

(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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Big Lots: Buy

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Source: MetaStock

Big Lots (BIG - commentary - Cramer's Take) has had a very impressive turnaround in the last month. The moving average convergence/divergence (MACD) and volume-adjusted moving averages have both gone positive. Volume is coming in on advances and drying up on declines.

The breakout move four days ago was impressive, with heavy volume and a wide trading range. Since then it has pulled back in a typical flag formation.

A strategy that would help one to get into the stock at a good price would be to put in a stop-buy order just above the upper limits of the flag, and lower its activation price if the flag continues to push lower. That way, as soon as the advance resumes, the stock is bought.

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Medco Health: Short

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Source: MetaStock

Notice on the chart of Medco Health (MHS - commentary - Cramer's Take) above the way in which the volume emphasis has changed. In the second half of last year, as the price advanced, volume was repeatedly seen to become heavier on the up days. But this year, starting just as the calendar turned, it began to have its heavy volume on down moves rather than up moves. That is almost always a bearish sign. The uptrend has been decisively broken, and now it has rallied, but on less-than-impressive volume. At the current levels, it looks like a short sale.

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Millennium Pharmaceuticals: Short

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Source: MetaStock

Wide tops tend to generate long declines, and wide bases tend to generate long advances. In the case of Millennium Pharmaceuticals (MLNM - commentary - Cramer's Take), above, it appears to have been a big top that formed in the last two months. Last week it dropped out of the bottom of that consolidation and has since rallied slightly. It looks as though it is headed lower and could be sold short around this price level.

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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 Stop and Make Money: How to Profit in the Stock Market Using Volume and Stop Orders, 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.

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