Indicators Help Show the Way in Ambivalent Market

Even though we seem to be having quite large market moves on many days, there is little follow-through in either direction, so that the overall effect is that the market is staying in the same place.

This ambivalence is reflected also in the Arms Index numbers. We have had a few days with quite bearish numbers, but they are almost immediately offset by bullish numbers. The result continues to be a lack of extremes, and therefore, no reliable signals, either to go long or go short.

We see that on the second chart below. All this is accompanied by remarkably low volume. Monday we had the quietest trading since last Christmas Eve, which was an abbreviated session. Low volume puts the validity of any move, whether up or down, in doubt.

But we do have some other things to go on. The most important, I believe, is the crossover of the moving average convergence/divergence (MACD), as can be seen at the top of the first chart below. That suggests we have entered an intermediate-term down cycle. Tuesday's low came right down to the low of last week. Any break below that level would be a further bearish sign.

It is an ambivalent market, but one that has a shorter-term bearish bias, and that in turn is part of the much bigger bear market that began last October. I see no reason for aggressive buying at this time.

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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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Limited Brands: Buy

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Source: MetaStock

In recent days, I have suggested a number of the retailers as possible buys. Limited Brands (LTD - commentary - Cramer's Take) is another.

Since mid-July, each up move has been on improving volume. The strength four days ago took it through a resistance level going back to May. The volume and trading range expanded greatly on the breakout, saying that it is likely to move higher.

It has now pulled back a little, and looks as though it could still do more of the same. Therefore, I am inclined to watch and wait, with the intention of buying a soon as strength appears to be resuming.

(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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Estee Lauder: Buy

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Source: MetaStock

Here is another breakout stock that looks as though it is starting a lasting upward move. Estee Lauder (EL - commentary - Cramer's Take) put in a very strong advance early last week. Volume and trading range both expanded greatly, producing what we call a power box to the upside.

As is typical, it then pulled back in a flag formation, which it is still in. I have indicated the upper and lower limits of the flag with parallel blue lines. I do not want to buy the stock until it moves out of the top of that flag, if it does. Therefore, a buy-stop order, placed just above the line, and moved lower if the stock moves lower, will accomplish that. That way, if the anticipated advance does not develop we do not buy the stock.

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Papa John's: Sell and Short

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Source: MetaStock

Papa John's (PZZA - commentary - Cramer's Take) was suggested as a buy on March 7. Since then, it has had a substantial advance, a drop back, a test of the resistance, and a return of weakness. It has broken a key support level, and now looks as though it could go lower. Notice particularly that the MACD, the indicator across the top of the chart, has crossed to the negative side. I believe anyone still holding a long position from the March buy suggestion should take the profits, and also, the stock could be considered for a short position.

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Raymond James: Sell and Short

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Source: MetaStock

Back on April 11, Raymond James was a buy recommendation, based upon upside volume through resistance. The advance since then has been very profitable. Now, though, it is starting to look as though it is turning lower.

It broke support a few days ago with increasing volume and a widening of the trading range. I am particularly bothered by the crossovers of both the MACD and the volume-adjusted moving-average lines. This looks like a good place to be selling the long position and initiating a short.

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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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