This column was originally published on RealMoney on Oct. 4 at 8:13 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Charles Dow, the father of technical analysis, made a big thing out of confirmations and nonconfirmations of the industrial and transportation averages.
On the chart below of these two indices, I have put small blue lines through the smaller trends, which Dow would have called secondary trends within the bull market.
The industrials have gone to a new high, exceeding the May 10 top, but the transports have not.
This is a glaring example of a nonconfirmation -- it would have caused Dow to say that the breakout in the industrials was not to be believed.
It would take a huge move in the transports to erase this nonconfirmation, which seems unlikely.
The implication is that the current new top is not only a head fake, but also a warning of the possible end of the bull market that started four years ago.
I have been remarking on the difficulty the markets have been encountering for about three weeks.
The Dow's move to a new high didn't have the look of a breakout, but rather of a minimal edging through resistance.
Volume remains unimpressive.
I remain cautious.
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.
Father of Dow Is not Smiling
Career Education: Buy
has backed off on very light trading after it broke through resistance on heavy volume last week. The breakout generated a square
, so the pullback was to be anticipated. Now it looks as though it is likely to start to strengthen again. The width of the base justifies a substantial advance. I see the stock as a buy around current levels.
Applied Micro Circuits: Buy
The up move in
Applied Micro Circuits
two days ago was very impressive. It pushed through a level that had been posing a problem for a month, and it did so with increasing volume and a widening trading range. The downtrend has been penetrated and the width of the base is large enough to justify a substantial advance. I would be inclined to buy in this neighborhood and put a stop-loss order just below the ascending trend line on the chart above.
Abbott Labs: Sell and Short
On July 12,
was suggested as a buy. It had moved above resistance with better volume. Now, after a long advance, it looks as though it has turned lower. The last two tops produced square Equivolume entries, suggesting resistance. The bottom of the consolidation was penetrated decisively Tuesday, therefore I believe those who went long in July should take profits, and I think the stock could be shorted around this level.
is another major stock that has moved down in spite of the market's strength. Notice the crossover of the two volume-adjusted moving averages. That tends to confirm an earlier signal by the MACD across the top of the chart. The decline two days ago was on heavier volume. Goodyear has not yet broken support decisively, but the down volume looks worrisome, and the ascending trend line has been penetrated. The stock looks like a sell around current levels.
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
. 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
Profits in Volume
Volume Cycles in the Stock Market
Trading Without Fear
The Arms Index
, and has been honored with the Market Technicians' Award for Lifetime Contribution to Technical Analysis. At the time of publication, he had no positions in stocks mentioned in this report, although holdings can change at any time. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Richard appreciates your feedback;
to send him an email.
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