A Better Rally, but No Saving Grace

This column was originally published on RealMoney on Aug. 24 at 8:21 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Going into Friday's market, it looked as though the Arms Index short-term numbers were suggesting a brief rally.

We did get a rally, and it certainly was unimpressive.

Now the averages again are pushing into lower regions.

In the meantime, though, we have not generated enough bullishness to get rid of the oversold condition.

In fact, now the 10-day moving average has joined the five-day moving average in oversold territory.

Consequently, it looks as though we again are ready for a trading rally. This one is likely to be better than the one we saw last week.

Traders might want to try to take advantage of such a bounce.

But keep in mind that the averages are in a downtrend.

A rally here is likely to be just a rally within a downward-sloping pattern.

I tend to look at the Dow, but it has been far stronger than almost any other indicator.

On the two charts below, compare the Dow to the Nasdaq. The Russell, S&P 500 and other major indices look more like the Nasdaq than the Dow.

It is apparent that we are in a downtrend, but that it may be overdone on a short-term basis.

I have warned for a number of weeks that the eventual move out of the consolidation was likely to be on the downside.

We are now in the midst of that decline. Trading against it could be hazardous unless you are very nimble.

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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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Too Rosy The Dow has been stronger than most other indices

Click here for larger image.

Source: Metastock

More in Common The Russell, S&P 500 and other major indices look more like the Nasdaq

Click here for larger image.

Source: Metastock

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Radio One (ROIAK:Nasdaq): Buy

Click here for larger image.

Source: Metastock

Radio One(ROIAK Quote) is an interesting stock as a possible buy. It appeared to complete a downward move in May. After that, it built a long base and then moved out of that base. Two days ago, it advanced through resistance with increasing volume and a widening trading range, creating a power box to the upside on the Equivolume chart. Tuesday, it traded on lighter volume as it absorbed the move. It looks as though it is likely to move higher over the next few weeks, and could be bought, especially if it pulls back a little further and volume dries up. (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 (EL:NYSE): Buy

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Source: Metastock

Estee Lauder(EL Quote) spent more than four months in a very narrow trading range, indicated by the pair of horizontal blue lines on the chart above. Then, a week ago, it moved decisively through the top of that trading zone. Notice the big volume, the wide trading range and the gap. All these are signs of strength, and suggest there is more to come. Usually we can look for a pullback on lighter volume before a resumption of an advance. I would be inclined to wait and see if it can go back down to the breakout level on light trading.

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ConocoPhillips (COP:NYSE): Short

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Source: Metastock

Last Friday, I suggested a short of Noble(NBL Quote). Now many other oil and gas stocks are joining it in looking likely to head lower. One of the largest of these is ConocoPhillips(COP Quote). The rising red channel is the very long-term uptrend. The lower line actually goes back more than two years. We are still in that uptrend, but the steeper uptrend has been violated. It came down with volume and range. Now it has rallied somewhat, but the rally lacks both volume and range. The stock looks like a sell for a potential return to the lower red line.

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Valero Energy (VLO:NYSE): Short

Click here for larger image.

Source: Metastock

Valero Energy(VLO Quote) is giving us a chart very similar to that of ConocoPhillips, and these are just two of many from this group that I could have chosen. Again, note the long-term up channel and then the steeper channel that began in May. The recent decline was done with heavier volume, and broke the steeper uptrend line. That suggests a return to the bottom of the longer-term channel. That would allow for a profitable short position put on around current levels.

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