Still Working Off an Overbought Condition

The further pulling back in the markets that was suggested here two days ago seems to have developed yesterday. But this comes after an extremely important advance on Monday. That move brought about a penetration of the prior high and gives us, for the first time in months, a pair of higher highs and higher lows.

That was a bullish development, but it came as the very short-term five-day Arms Index moving average was quite overbought. It seemed likely, therefore, that some short-term pulling back would develop. That overbought condition has been partially eliminated in the last two days, and the offsets are such that the next two days are likely to completely eliminate it. Moreover, the longer-term Arms Index moving averages remain very oversold.

We should be getting close to a resumption of the advance that began on Monday.

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Dow Industrials

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Source: Metastock

Arms Index

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Source: Metastock

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Johnson & Johnson: Cover Shorts and Buy

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Source: Metastock

There has been a big decline and then a basing process since Johnson & Johnson (JNJ - commentary - Cramer's Take) was suggested as a short sale on Oct. 1. Now it has started to show enough strength to suggest it is starting to turn higher. The MACD has crossed to the plus side, and the two volume-adjusted moving averages look as though they are about to do the same. The strength a few days ago was enough to slightly penetrate the descending trendline that goes back to the high just before the short was suggested. This looks like a good time to be covering the short positions, and even initiating a new long position.

(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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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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