Watch Out for a Pullback Ahead
By Dick Arms
Special to TheStreet.com
4/23/01 9:01 AM ET
Dick Arms is best known as the inventor of the Arms Index and Equivolume Charting. He is the author of four books on technical analysis, and publishes a weekly advisory letter for institutions and an Internet advisory service for the public.
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What a change in just three weeks! The last time I had the privilege of filling in for Bill Meehan was April 2. At that time, bearishness and pessimism were everywhere. Yet one factor, which we looked at then, was suggesting better times ahead.
On March 22, the 10-day moving average of the Arms Index had gone to a reading over 1.50 for only the seventh period in the past 32 years. (The Arms Index shows the relationship between the number of stocks that increase in price and those that decrease, and the volume associated with those stocks.) Each time that had happened before, it led to a big market advance, lasting at least six months. Moreover, a big reversal on huge volume had occurred March 22, followed by a light volume test of the low April 2. That was a classic bottoming formation. The stage seemed to be set, at that time, for a big advance, but nobody wanted to believe it.
Now, with the Dow having moved up 19% from its intraday lows to its intraday highs during this rally over the past few weeks, the Nasdaq up 36% and the Philadelphia Stock Exchange Semiconductor Index, or SOX, posting a whopping gain of 53%, everyone seems to be feeling quite differently. The Arms Index appears to have again pinpointed an important turning point.
But before we get too exuberant, perhaps we need to take another look at that index, at least on a short-term basis. It has now moved all the way from the very oversold levels of a month ago to quite overbought levels. The recent buying has swung the preponderance of volume to the advancing issues for so long that we are seeing the five-day, the 10-day and even the 21-day starting to say, "Watch out." (Charts of those indices can be seen on the ArmsInsider.com Web site.)
A typical market bottom is one in which we have a major volume low, a quick test a few days later and then a return to -- or toward -- the lows on lighter volume a few weeks or even months later. The current readings are implying that the market is preparing to go into such a secondary testing phase. The success or failure of that test will be all-important for the market.
The Arms Index signal we received in late March suggests that the test will be successful and that there is a better market out there waiting for us. But right now, the numbers warn of some pulling back first |
