The markets did it again. On Tuesday, I was remarking on last Friday's one-day reversal and called it a sign of weakness. The big gain in early trading on Wednesday turned into a substantial loss later in the day, giving us another one-day reversal.
So far, the Dow and the S&P 500, shown below, are still in a trading range, but these signs of weakness are warning that this is starting to look like an important top may be developing. That is reinforced by the far weaker performance of Nasdaq. It has broken support, and may be leading the way lower.
The shorter-term Arms Index moving averages are overbought, as we see on the second chart. The volatility index (VIX) is showing too much complacency. I stand by my warning that we are likely to see a sharp drop to the cycle low projected for the end of the month. There should be room for playing the short side in aggressive accounts. More conservative stockowners should, I believe, be taking some profits.
Arms Candlevolume
StockCharts.com
View Chart »View in New Window »
Arms Index
Metastock
View Chart »View in New Window »
(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.)
Intel: Buy
INTC
StockCharts.com
View Chart »View in New Window »
Long sideways moves with alternating red and black entries on the Arms Candlevolume chart are called checkerboards. They are often seen on tops or partway in a move, but rarely on bottoms. In themselves, they tell us little about the ensuing move until a breakout up or down occurs. But when that happens, the subsequent move is likely to be big enough to be profitable. In the case of Intel (INTC), the breakout to the upside, the pullback and now the resumption of strength make it look like a buy around current levels.
J.C. Penney: Short
JCP
StockCharts.com
View Chart »View in New Window »
The wide consolidation recently in J C Penney (JCP) is different from the checkerboard in the prior stock, in that volume has decreased across the pattern and it has a higher center, making it look like a typical head and shoulders. Unlike the checkerboard it carries the implication that the next move will be to the downside. I would suggest putting on a partial position on the short side here, with the intention of adding to it when and if the support neckline is broken.
At the time of publication, Arms had no positions in stocks mentioned.