Market Action Prolongs the Agony

The steep decline since the middle of May accelerated to the downside at the end of last week. But the interesting and disturbing thing has been the reluctance of it to be reflected by an oversold condition. One would expect to see the VIX go to quite high numbers, and the moving averages of the Arms Index to become dramatically oversold, yet we have seen neither occur. This is indicating a lack of panic, yet, and usually a decline as long and as steep as this one ends in capitulation. The suggestion, therefore, is that it is not over.

After last Thursday's big decline, and the follow-through drop on Friday, some holding and rallying was to be expected, and it has, to a very limited extent, come in over the last two sessions. But it seems to be doing nothing more than prolonging the agony. Neutral numbers have gone into the Arms Index sequence, so that we are still only mildly on the oversold side of neutral, as can be seen on the second chart below.

This has all been a down leg within the bigger bear move that we have been observing since last October, and it does not seem to yet be over. We will get a better rally, and probably very soon, but remember, it will be a bear market rally. Bear market rallies are for selling.

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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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Dow Jones Industrial Average

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Source: MetaStock

Arms Indices

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Source: MetaStock

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Barrick Gold: Buy

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Source: MetaStock

After a major pullback over the last few months, and then a base-building period, the gold stocks all started to act very well in the last few days. Barrick Gold (ABX - commentary - Cramer's Take), shown above, has broken out with increasing volume and a widening trading range. It left a gap behind as it penetrated the May high.

The two volume-adjusted moving averages that overlie the price plot have crossed to the positive side, and so has the moving average convergence/divergence (MACD) across the top of the chart. I would expect a lighter-volume pullback over the next week or so, and would use such a pullback as a buying opportunity.

(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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Newmont Mining: Buy

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Source: MetaStock

Newmont Mining (NEM - commentary - Cramer's Take) is another gold stock that has started to act well in the last few days. As with Barrick, we have a volume move through resistance. We have a wide enough base to support a substantial move. The MACD has crossed to the plus side, and so have the two moving average lines.

Here, too, it would not be surprising to see a lighter-volume pullback before going higher. Consequently, I am inclined to hold back a bit, rather than jump in at this level.

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Brucker Biosciences: Buy

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Source: MetaStock

Brucker Biosciences (BRKR - commentary - Cramer's Take) broke out to the upside almost two weeks ago. Notice the heavy volume and the widening trading ranges as it moved through the resistance level.

Since then it has drifted slightly lower with lighter trading, giving us a very typical small triangular formation. This appears to be giving us an opportunity to use the technique of buying on a stop-buy order. Placing a buy just above the buy line indicated, and following the line down by moving the stop lower if necessary, sets up the situation in which the stock gets bought as soon as strength resumes, and it penetrates that line. If it continues lower, and does not act well, the stock never gets bought.

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Celanese: Short

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Source: MetaStock

The sharp continued drop in Celanese (CE - commentary - Cramer's Take) Monday may have overdone it on the downside for the short-term, but longer-term, the stock looks as though it is headed lower.

Three days ago, it broke a very important support level with heavy volume. It has penetrated both the steeper and the less-steep uptrend lines. The MACD went negative a week ago, and the two moving-average lines are just crossing over. I would look for a rally on light volume as an opportunity to put on a short position.

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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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