A sharp rally on Thursday seemed to perk up the markets last week and Friday's sideways consolidation was a welcome surprise given the Bear market conditions. For the week, the Nasdaq (+2.68%) was the big winner followed by the Dow (+1.55%). The oil-heavy Amex lost 1.33% and the other major averages moved sideways.

(To see for yourself, go to our Major Markets PerfChart, press the F1 key to shorten the slider to one week, then click the Histogram icon in the lower left corner of the chart.)

For a longer-term perspective, be sure to visit the ChartWatchers Public Chart list. The first chart there shows last year's failed Nasdaq turnaround that we are still trying to escape from. While Friday's move above the 50-day Moving Average was promising, we've only retraced 46.5% of the most recent downleg. Expect some "turbulence" as the Nasdaq tries to climb above 50%.

Accumulation

(Below is an example of the new, improved entries you'll find in our Chart School Glossary area. We've started a multi-month effort to improve and expand our educational material along these lines. Enjoy!)

Accumulation is the act of buying more shares of a security without causing the price to increase significantly. After a decline, a stock may start to base and trade sideways for an extended period. While this base builds, well-informed traders and investors may seek to establish or increase existing long positions. In that case, the stock is said to have come under accumulation. A quiet accumulation period is usually subtle and not enough to advance the stock price. More aggressive accumulation periods are likely to put upward pressure on the price. While most often associated with "bottoms", accumulation can also happen during any significant sideways movement.

The opposite of accumulation is called "distribution."

There are several indicators designed to measure accumulation and distribution. All of them combine price and volume in some way. Examples include: On Balance Volume (OBV), the Accumulation/Distribution Line, and the Chaikin Money Flow (CMF). A more technical definition of accumulation is a positive divergence between a stock's price movement and a price-volume indicator.

The chart above shows a four month accumulation period. During that period, the stock moved sideways while the 20-day CMF increased steadily. Notice that CMF(20) remained strong while the stock continued to consolidate. This accumulation period foreshadowed a very nice breakout in mid-December.

NASDAQ TESTING 200-DAY AVERAGE -- GOOD RELATIVE STRENGTH... The market had a good week -- topped off by Thursday's impressive rebound. Yesterday we showed the Nasdaq 100 exceeding its February high and its 200-day average. The Nasdaq Composite Index is still testing those resistance barriers. Chart 1 shows the Nasdaq closing slightly lower today (Friday) after touching its (red) 200-day average and its February highs near 1350. An upside breakout through that level is needed to turn its short-term trend higher. The rising relative strength (under the chart) shows the Nasdaq outperforming the NYSE Index since the start of February. The ratio has already exceeded its November high. It's usually supportive for the rest of the market when the Nasdaq is leading it higher. That's why we believe that an upside breakout in the Nasdaq next week is necessary to continue the oversold rebound that started this week. That would be positive for the Nasdaq and the rest of the market.

ADOBE STANDOUT NASDAQ STOCK... Adobe was Friday's standout performer in the Nasdaq community. The daily chart shows an impressive combination of price and volume action. The software stock gapped to a three-month high on huge volume. A close through its late-November highs would put it at a nine-month high. The weekly chart also looks positive. An upside breakout would push Adobe through a two-year down trendline -- and could pave the way for a move up to the low 40s. Its rising relative strength line is another positive factor.

ENERGY WAS WEAKEST SECTOR FOR WEEK... Another positive development for the stock market was relative weakness in energy stocks (and a big drop in the price of oil). The Oil Service Index failed a challenge of its December high two weeks ago and has been dropping since then. The daily MACD lines turned negative on Monday. The relative strength has also rolled over to the downside -- breaking its seven-week uptrend. While that's bad news for oil traders -- and holders of energy stocks -- it's good news for the rest of the market.

To get John's commentary throughout the week, sign up for John Murphy's Market Message by clicking here.

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Members who subscribe to John Murphy's Market Message can now review John's slides and notes from his recent presentations at the Florida Money Show and the New York On-line Trading Expo. It's almost as good as being there!

Start Planning for Vegas!
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The Arms Index, named after its inventor Richard Arms (also known as the TRIN), is one of the most widely followed indicators there is. The basic calculation is as follows:

Advancing Stocks/Declining Stocks
----------------------------------
Advancing Volume/Declining Volume 

When the Arms Index reaches oversold readings of 2.0 or higher (note that the chart scale above is inverted), it is a fairly reliable signal that the next day will be an up day. While deeply oversold readings are frequently found at important market bottoms, the one-day Arms Index is strictly a short-term indicator that helps us identify instances of extreme selling pressure. It is interesting to note that the July and October lows were not accompanied by an Arms Index reading of over 2.0.

The unusual thing about the chart above is that the Arms Index has hit readings of 2.0 or higher 39 times in the last 12 months (35 times in 2002, and 14 times in 2001). In DecisionPoint.com's PRIME service we have one-year Arms Index charts going back to 1965, and there is no other year that even comes close to this frequency of occurrence. The closest is 1974 with 18 -- the year of a major bear market low. In 1982 there were only 13 occurrences, and 8 in 1990.

The recent high frequency of oversold readings is a reflection of the intense, relentless selling pressure the market has experienced during what is probably the worst bear market in over 100 years. Does it indicate that the market is in the process of putting in a long-term bottom? There is really no way to know because we've never seen anything like this before, which is really the point that needs to be made.

We are in a market environment unlike anything that has been experienced since 1929-1932. There is virtually no one involved in the market today who has experienced and, more important, truly understood that earlier period of market history, and the technical statistics available for comparison are scant to say the least. The best we can do is observe and learn, because much of what we thought we knew is being turned on its head.

Charts courtesy of DecisionPoint.com

Carl's website, DecisionPoint.com, contains the most compehensive collection of market indicator charts on the net. Breadth charts, Investor sentiment charts, P/E charts, even historical charts going back to the 1920s - DecisionPoint has it all!

In his book, "What Works on Wall Street", James P. O'Shaughnessy singles out relative performance as one of the most valuable tools for successful stock selection. With this in mind, it is worth noting that the Biotech HOLDRs (BBH) have been showing good relative strength over the last few months. While the S&P 500 is testing its October lows and the Nasdaq Composite broke below its November/December lows, BBH has held support at 84 for over four months.

Within the biotech group, Biomet (BMET) is also showing good relative strength and this bodes well for future price performance. The price relative (BMET relative to COMPQ) has been trending higher for three years with two parts to the advance: Mar-00 to Oct-01 and Nov-01 to the present. The second advance is not as strong (steep), but the lower trendline is holding and higher highs are being recorded. As long as the late November low holds (red arrow), relative performance will be deemed strong and higher prices expected in the underlying stock.

On the price chart, BMET held the Oct-99 trendline in Jul-01 and is currently testing resistance in the low 30s. The 15-month pattern looks like a big inverted head-and-shoulders with neckline resistance around 31-32. The head-and-shoulders is debatable, but resistance at 32 is well established with a trendline (5 touches) and the October/November highs. More recent price action reveals a sharp advance (Jul-01 to Nov-01) followed by a consolidation over the last four months. A move above 32 would break resistance and open the door to new highs. Using the head-and-shoulders for guidance, a breakout would project further gains to around 40.

For more of Arthur's insights, check out his web site, TDTrader.com.

Regarding our SHORT-TERM TRADING PERSPECTIVE, many have "pulled the trigger first, only to ask questions later" in regards to Thursday�s and Friday�s short-covering bout hence the quickness and sharpness of the rally. And while we want to be "quick", we don�t� want to be "too quick" given we very well may take us out of proper short positions after only 2 � days of rally...approximately 18 hours of rally to put it into perspective. In essence, this is the nature of short-covering rallies-to give one pause for concern-to test the will of many -and in our case...tremendous pause, and tremendous concern. However, when we look at the sharp rally on February 13th, 14th and 18th, in which the Dow Industrials rose 560 points, but then turned on the proverbial dime - then actually declining to new reactionary lows - having broken no significant resistance levels. Hence, whether this is the case of a bottoming formation is not yet known - further time is required to determine this. But having said this, we know that markets can trade illogical for far longer than we can stay solvent.

If you want more of Richard's award winning advise, check out his website: TheRhodesReport.com - Highly recommended!

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• John Murphy's Getting Started with StockCharts.com



• John Murphy's 10 "Laws" of Technical Trading



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• All About Charting and Technical Analysis



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