March 1, 2010

ADVISORY

RICHARD W. ARMS JR.

800 WAGON TRAIN DRIVE SE ALBUQUERQUE, NM 87123OFFICE (505) 293-4438 FAX (505) 298-2833

March 1, 2010,

WHERE ARE WE NOW?

It has become apparent that an important change came over the markets at the start of thisyear. But that change had been signaled much earlier, in late October, when the S&P500, shown on the chart below, went down enough to break the uptrend line of the bullmarket. I have enclosed that important time in October with an ellipse. It implied the bullmove that began in March was losing momentum, and becoming, if not a sideways move,at least a slower advancing upward move.

March 1, 2010

From then until year-end a very regular, but slower, uptrend became apparent. At the endof the year we were right up against the top of that uptrend, and suddenly we started tohave tight trading ranges and lack of progress, implying difficult overhead resistance.Then the AI moving averages got overbought. The market was still moving higher, butthe advance looked suspicious.The sudden break in January only hesitated briefly at the lower trendline of the up pattern before breaking it. Moreover, volume started to come in heavily on the down days, ascompared to the up days. At the time, but even more so in retrospect, that break takes ona big importance, I believe. It turned the up move into a sideways move. It seemed toconfirm that the bull market of most of last year had been turned back.On the same chart I have inserted three horizontal blue lines. The upper and the lower seem to define the consolidation that has, in reality been building since last September.The upper line is around 1115 and the lower line is around 1040. The upper limit is inthe vicinity of the highs of November and December, while the low was established inthat important October break. But both those levels were tested in the last few weeks.When we note this broad consolidation and combine it with a shift in volume to thedownside, and a breaking of the uptrend, it is not hard to see this as a potential head-and-shoulders top. If so, we have just bumped up against the top of the right shoulder in thelast few days, and the neckline is around the lows of February. A break of that neckline,especially with heavy volume and a wide trading range, would be a very bearishdevelopment.The central blue horizontal line combines with the upper to give us a very small tradingrange that has been with us for two weeks, and that matches the trading range of November and December. The lower limit was approached on Thursday, leading to thefeeble rally of late that day, and into Friday. I do not see it as a particularly significantlevel.

March 1, 2010

On the chart below I have taken a much closer look at the data. The inserted commentsare taken from the weekly letters since the first of the year. They show us just howerratic and indecisive the recent swings have been. Note my comment last week,guessing that the small rally was about over. That was based on the overbought positionsof the 5-day and 10-day moving averages of the Arms Index..We did get a little pullback last week, but not much. Volume was low in both directionsand trading ranges did not expand enough to give a clue as to likely future direction.A week ago the Arms index numbers were quite overbought. Volume had been comingin heavily on the down issues. That and the reaching of a likely resistance level were themain clues to a possible downturn. In addition, as can be noted on the above chart, theweek had ended with a very tight trading range, suggesting difficult overhead resistance.The Arms Index is telling a rather different tale this week, though. Take a look at thenext chart, showing the 5-day and 10-day moving averages.