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Traditional technical analysis, based on the work of Charles Dow, holds that a move to new highs in the
must be confirmed by a similar move to new highs in the Transports in order for the advance to be considered a valid breakout and a bullish indication.
The reasoning is that the Industrials represent the production of goods and the Transports represent the moving of those goods to market. If the two averages do not confirm one another, the move is suspect under this methodology.
It looks as though we may be seeing such a nonconfirmation developing. We see that potential nonconfirmation on the chart below. If we have enough of a downturn here to roll the two averages over, it will have longer-term implications, according to Dow theory.
On a shorter-term basis, we are still in the sideways area I have been commenting on for the last month. The anticipation and realization of Tuesday's
statement didn't move the markets enough to cause a breakout in either direction. But I was struck by the far weaker action of the Transports.
The Arms Index moving averages remain quite neutral and uninformative. My attitude remains "wait and see."
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.
New Highs Are Suspect
Feb. 24, I suggested covering previously suggested short positions and moving to
long side. The stock has moved up well but looks as though it could go further.
After a two-month consolidation, it broke out above resistance three days ago with very heavy volume and a wide trading range.
MACD and moving averages both have crossed to the plus side. I anticipate the stock will pull back on lighter volume before it goes higher, and would look for such a pullback as an opportunity to become a buyer. (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,
has an interesting chart. It has traded to the upside with heavy volume for the first time in many months, leaving a gap behind and breaking out above the prior tops. That qualifies it for the designation "power box" and suggests the stock is headed higher. The width of the base is enough to justify a profitable move. It has rested a bit in the last two days, and there is not much room for a pullback. I would be a buyer around current levels.
After steadily advancing since June,
appears to have turned lower. The weakness at the end of last week was enough to break the price down through both the ascending trendline and the latest level of support. I have enclosed the crossovers of the MACD and the volume-adjusted moving averages in ellipses. They are bearish signals. The rally of the last three days was on light volume and did not take the price very far. At this level the stock looks like an attractive short sale.
Auxilium Pharma: Short
After generating a power box to the upside in September and then making a strong advance,
now presents what looks like a power box to the downside. The heavy-volume decline was enough to break both the ascending trendline and last level of support. The stock has tried to rally a little on much lighter volume but has not yet gotten very far. I would be inclined to look for more rallying before I shorted the stock.
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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