It's Not Too Late to Get On Board

It is sometimes uncanny how the technical indicators seem to foretell the seemingly unpredictable. At the end of last week, the Arms Index moving averages were becoming quite oversold, and by Monday's close, they had reached quite extreme levels on the five- and 10-day moving averages. The implication was that it was about time to be doing some buying, yet there was no way of anticipating the Fed action that came in on Tuesday's opening, causing prices to skyrocket.

On the charts below, we see, first, the way in which the Dow bounced off a very logical support level. It did so on lighter volume than the original low back in January, making it look like a valid test of the prior low. That suggests we are due for a more lasting advance than other rallies we have seen recently.

The second chart shows us that the Arms Index moving averages are still oversold, suggesting that the rally is just beginning. In my column last Friday, I was suggesting doing some buying. I do not think it is too late to be doing so now.

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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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Light Volume Suggests a Successful Bottom Test

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Source: MetaStock

Click here for larger image.

Source: MetaStock

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Ciena: Buy

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Source: MetaStock

Many of the technology stocks are starting to act better. In a market that has been moving lower, they have given signs of bottoming, and a few are turning higher. This stock, and the next two, are all tech stocks that appear to fall into that category.

Ciena (CIEN - commentary - Cramer's Take) moved higher three days ago, with very heavy volume. It penetrated the prior high. Now it has pulled back a bit on much lighter trading, presenting an opportunity to buy it at a somewhat better level.

(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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Microsoft: Buy

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Source: MetaStock

Microsoft (MSFT - commentary - Cramer's Take), the giant in the category, may have started to turn up Tuesday, but it is admittedly an early call. However, the decline that started in November took it down to the old support level, and since then, it has lost downward momentum.

Now we are starting to see some strength develop. The moving average convergence/divergence (MACD) had gone positive, and the two volume-adjusted moving averages look as though they are likely to do the same. I would be inclined to buy a partial position in this area, with the intention of adding to it if the up move becomes more apparent.

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Oracle: Buy

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Source: MetaStock

Oracle (ORCL - commentary - Cramer's Take) is another example of a tech stock that appears to be turning higher. Last week, it moved up enough to break the descending trend line. I like the fact that volume increased, as did the trading range, and it left a gap behind.

Tuesday, with the strong market, it extended the gain. The MACD has gone positive. In that we have such an oversold overall market, I am inclined to move into this stock without waiting for a pullback.

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Copart: Short

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Source: MetaStock

The sudden drop in Copart (CPRT - commentary - Cramer's Take) three days ago looks like a harbinger of things to come. The huge volume after the gap took it through support. In the days since then it has attempted to rally on lighter trading, which is quite typical action. This has produced a slight uptrend which can be defined by a line across the lows, as I have indicated.

In that the market is acting better, I would be inclined to not short the stock until that line is decisively broken by a resumption of the drop. A stop-sell order could be used to accomplish such an entry.

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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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