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Going into Friday's market last week, we had seen four up days, but the rally looked suspect because of the low volume and the still-overbought Arms Index numbers. But the selling on Friday and Monday produced high-enough daily Arms Index values to push the 10-day moving average to its most oversold level in about two months.

Tuesday, the markets staged a very impressive one-day reversal as they tested and bounced off the January lows again. Volume was a bit better on the reversal. The Arms Index numbers remain oversold for the 10-day moving average. This looks as though it may be the beginning of a rally.

On a cyclical basis, as I showed last week, a low is due in this vicinity. This may be the start of a turn to the upside.

The cycles recently have had a wavelength of about two months, trough to trough, and the moves in each direction have been in the neighborhood of 300 to 400

Dow

points. On that basis we might project a rise to around 10,800 over the next few weeks.

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The real key will be a breaking of last week's highs on good volume. I think, though, the likelihood is good enough to justify some buying in here. We have ridden the whole decline down, resisting the impulse, until now, to buy. I now am more aggressive than I have been in well over a month.

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.

Computer Sciences (CSC:NYSE): Buy

Computer Sciences

(CSC)

has had a long decline since December, but it now appears to be starting to turn to the upside. After a move upward on volume two days ago, it backed off in early trading with the market Tuesday and then strengthened. The wide base and penetration of the descending trendline look good. So do the two volume-adjusted moving averages just crossing to the plus side. CS looks like a buy around current levels. (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

.)

Advanced Micro Devices (AMD:NYSE): Buy

Advanced Micro Devices

(AMD) - Get Report

is another technology stock that appears to be starting a move to the upside. Back in January, it dropped on high volume, producing what looked like a climactic low. After a long base-building period, that low was tested in March on much lighter volume. Now AMD has started to strengthen again. Volume on the upside three days ago was very impressive. AMD spent the next two days resting, but it looks as though it soon will resume the advance.

Schering-Plough (SGP:NYSE): Buy

After spending a week in a strong advance with heavy volume and wide trading ranges,

Schering-Plough

(SGP)

pulled back a little Tuesday. But volume became lighter on the pullback, and no technical damage was done. The stock appears to have reversed from a downtrend in a convincing manner. This pullback allows buying at a somewhat better level.

Texas Instruments (TXN:NYSE): Short

Texas Instruments

(TXN) - Get Report

actually turned lower in March but then seemed to find a support level. Tuesday, however, that level was penetrated with heavier volume and a widening trading range. That is a sign of weakness that suggests the decline is likely to go further. I see it as a short, especially on a lighter-volume rally.

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

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. 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.

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