After the sharp drop of last Friday and Monday, the subsequent rally has gone further than would normally be expected, but that does not seem to change the basic situation. It is reflecting a high level of resiliency, and probably a great deal of short-covering on the part of traders who were disappointed that the decline found support so quickly.

But it still appears that the up move that began in March, and then accelerated in July, ran into very tough overhead supply, moved in a big lateral move for two weeks, and then gave an unmistakable sign of weakness with the penetration of the bottom of the consolidation.

It has been particularly noticeable that the total market volume on recent down days has been heavier than on the up days. That implies money leaving the marketplace and points to further weakness ahead.

On the second chart below notice especially the 21-day moving average of the Arms Index. It continues to be in extreme overbought territory, unrivaled in about two years. The message is that we are likely to see a drop of intermediate term duration.

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Dow Jones Industrial Average Source: Metastock

Arms Index Source: Metastock

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Aetna: Buy

Source: Metastock

Aetna is acting extremely well. Since the March lows, it has moved upward with a series of higher lows and a flat top, until late July when it decisively moved through the overhead resistance. Notice the very good upside volume recently as it has broken each old high. In the last three days it pulled back with a small, lighter-volume flag, but now the advance appears to have resumed. It looks like a buy around current levels.

(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.)

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Air Methods: Buy

Source: Metastock

Air Methods broke out two seeks ago. The three-month consolidation preceding that upthrust suggests that a substantial advance may lie ahead. That consolidation is indicatged by the two parallel lines on the above chart. Ever since the March low, volume has been far better on advances than on declines. MACD has gone positive. The advance of the last week may have gone a bit too far, so I would try to wait for a pullback before jumping in.

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Agilent Technologies: Sell

Source: Metastock

Agilent Technologies was suggested as a buy on July 1. It has had a good advance in a short time, and now it is giving indications it is starting to top out. Three sessions ago it traded very heavy volume after an upward gap, generating a large square Equivolume entry. Such action is very often the final blast in an upward move, and it often leads to a subsequent decline. In view, also, of a market that may be vulnerable, I am inclined to take the profits. On the other hand, there is not yet enough evidence to justify going to the short side.

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Nokia: Short

Source: Metastock

Nokia has been acting far worse than the market anyway, but now it has again broken a key support level and looks as though it can go lower. The wide top justifies more downside than has occurred so far. MACD is again crossing to the negative side. I think it can be sold short around its current price.