This commentary originally appeared Jan. 19 at 6 a.m. EST on Real Money Pro – the ultimate resource for actionable trade ideas and in-depth market analysis. Click here to learn more.
Although the markets continue to edge higher, slightly crossing the late-October highs, it's a low-volume move with no conviction. Tuesday's early advance, which gave the impression of the start of better action, lost momentum almost immediately. The resumption of the rise on Wednesday mostly retraced the prior day's hesitancy.
I am particularly bothered that we are seeing overbought numbers on the shorter-term Arms Index's moving averages. Also, the overbought condition is now starting to show up in the 21-day moving average, suggesting a more emphatic pullback. The continued strength exacerbates the overbought numbers.
Therefore, I see no reason to be buying at this time, even for the longer term. There is likely to be a better opportunity before long. Traders could consider a short position as soon as a sign of weakness materializes. That signal would be a drop that breaks the very steep recent uptrend, especially with an increase in volume. On the first chart, I inserted a red rectangle around 1230 to indicate where I think a drop will likely take the S&P 500.
(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.)
Bank of America: Buy
The last time we looked at Bank of America (BAC) was a buy recommendation on Aug. 30. That call turned out to be early. We are now at about the same level as then, but a great deal more base has been generated in the meantime. The long-term downtrend has been penetrated and we are starting to see volume come in on the upside. This is a stock that everyone wants to hate, but it looks as though on a longer-term basis it could provide a good upward move. It is likely to pull back a bit here, with the market, after the strength of the last three weeks. If so, I would consider it a buy.
The stock of PulteGroup (PHM) appears to have attained a logical objective. It was suggested as a buy Nov. 1 as it pulled back after breaking out of a base. Considering the volume in a base is likely to be about equal to the volume in the ensuing advance, this looks like a case where volume has been used up. BAC is also approaching the highs of last July. With the Relative Strength Index (RSI) having gone to an extreme, I suggest taking profits on the long position. However, there is no wide top to generate a big downward move yet, and there is no discernable sign of a downturn. Hence, I would not go to the short side yet.