A Brief Arms Index Primer

 | Jul 19, 2012 | 7:00 AM EDT
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This commentary originally appeared July 19 on Real Money Pro – Click here to learn about this dynamic market information service for active traders.

Here's a different way of looking at data that may be new to readers who never read one of my early books, The Arms Index. It merely superimposes the two moving averages that comprise the index. In that way, the longer-term moving average becomes the baseline around which the shorter-term moving average oscillates. I have shown two applications, one for investors and one for aggressive traders. Note that in both cases, but on different time frames, one wants to be long when the short term is above the long term, and vice versa.

The message we get from the two charts seems clear and bears out what I have been writing. On the long-term chart, we see that the markets are now in a downward move, and it seems to have a good deal further to go. Therefore, investors should remain very cautious.

On the second chart, we see that the current upward move was signaled last week, and seems to be getting a bit long in the tooth. The two lines are still very much in positive territory, but note that they have passed what is usually the maximum separation. Traders should be taking profits, or at least have close protective stops.

S&P 500
Source: MetaStock
The Arms Index
Source: MetaStock

(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.)

National Fuel Gas: Buy

National Fuel Gas (NFG)
Source: MetaStock

National Fuel Gas (NFG) presents us with a chart that meets many of the requirements of what to look for as an attractive potential buy. A long and steady decline finds enough support to build a base and penetrate the descending trendline. There's volume coming in on advances, suggesting underlying demand. It has ascending bottoms. Buying the stock in this vicinity, one could put in a protective stop just below the line that delineates the rising bottoms. It looks like a situation in which the risk is relatively small and the potential gain is relatively large.

Netflix: Buy

Netflix (NFLX)
Source: MetaStock

The sudden upward move in Netflix (NFLX) two weeks ago was a strong sign, suggesting further upside, but the stock may be a bit overdone on a short-term basis. The crossover of the MACD and the volume on the advance, plus the gap, make me want to own the stock. A pullback on lighter volume seems like a good time to enter the position.

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