The chart below gives us a very interesting picture of the relative performance of the Dow Jones Industrial Average and Nasdaq Composite. The blue line shows how well the Nasdaq has done, compared with the Dow, over the last 50 trading days. The red line gives the same information over the last 100 trading days. The black line, for reference, is the Nasdaq. Peaks in the red and blue lines are seen when the Nasdaq has been doing better than the Dow, and troughs are seen when the Nasdaq has been doing poorly compared to the Dow.

It is apparent at this time that the Nasdaq has been underperforming by both measurements. The implication is that we are going to see the Nasdaq doing better than the Dow for a few weeks as it plays catch-up. That could, of course, just mean that it does less badly, but it suggests, nevertheless, that traders should be looking for opportunities in Nasdaq-type stocks.

Recent market action has continued to be indecisive. Monday's rally was very encouraging, but it faded later in the day. On Tuesday the averages went back up to where they had been during the session on Monday, but then quit rising, so nothing was gained. We are still in a sideways zone that has lasted for 15 sessions.

In the meantime, the shorter-term Arms Index moving averages are somewhat overbought, suggesting a down move rather than a further advance. I am not willing to jump in at this point. If the Arms Index does break out decisively one way or the other, that will be the time to act.


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.


Catch-Up
Lagging Nasdaq is likely to do better than the Dow for a bit
Click here for larger image.
Source: Metastock


Pitney Bowes: Buy


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Source: Metastock

In mid-March, Pitney Bowes ( PBI) almost went down to the lows of last November, where it found support. The subsequent rally was on heavier volume with a widening trading range. The stock broke through the top of the descending channel it had been in, and also went above a key resistance level. The rise in the last two days is rather steep, suggesting PB is likely to pull back some before going higher. I like the chart, but would be inclined to hold back on buying to see if the pullback (read: buying opportunity) develops. (To do my Equivolume charting, as in the charts that appear in this column, I use a program called MetaStock. To learn more about this method, read my series of columns Trading With Equivolume.)


EarthLink: Cover Shorts and Buy


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Source: Metastock

On Jan. 6., I highlighted EarthLink ( ELNK) as a short sale. The decline since then appeared to be finding support, with the upward move with better volume and a gap on March 23. After a pullback, the stock had another burst of strength a week ago, and has since pulled back on lighter trading. I now suggest covering the short position and moving to the long side, because it appears ready for a further advance.


Discovery Laboratories: Short


Click here for larger image.
Source: Metastock

When a stock breaks down through an old level of support with increasing volume and a widening of the trading range, it is a sign of weakness. In the case of Discovery Labs ( DSCO), it broke two support levels three days ago, and did so with the heaviest volume of the year. It now looks as though it is headed lower, and could be considered for a short position around current levels.


Cytyc: Short


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Source: Metastock

The recent action in Cytyc has the look of a broad head-and-shoulders pattern formed after a strong advance. The left shoulder would be the December high, followed by the head in late January and the right shoulder in March. The decline last week broke the support of February decisively. The MACD has crossed to the negative side and so have the volume-adjusted moving averages. The rally on light volume in the last few days seems to be giving us an opportunity to short at a more advantageous level.


Please note that due to factors including low market capitalization and/or insufficient public float, we consider Discovery Laboratories to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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. Richard appreciates your feedback; click here to send him an email.

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