Time to Ignore the Bears?

The huge drop on Monday was as much as 800 Dow points at one time, but then a rally regained about 400 of those points. The volume on the drop was heavier, but not immense. The press and the commentators concentrated on the drop, and seemed to ignore the rebound. Yet that rebound may be very significant.

If, as it seemed, we had panic selling hitting all groups indiscriminately, that could set the stage for a significant rally. The level of disbelief, in that case, is a plus. The next action would be expected to be second thoughts, where the low was approached again, but those second thoughts should be on lighter trading. That seems to be what we saw Tuesday. I think there is an excellent possibility that we will now see a better advance.

One encouraging factor is the more oversold condition that has developed in the Arms Index. The 10-day is shown on the second chart below. In addition, looking at individual stock charts, the capitulation is more evident than in the averages.

Combining that with the market action, and various other indicators that are at oversold extremes, it appears to be a time to ignore the extreme bearishness, and go in the direction opposite to the fleeing masses.

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To view a larger version of these charts (in some browsers), after clicking on the "larger image" link below the chart, mouse over the lower-right area of the chart until the icon with four arrows appears. Then click on that icon.

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Dow Jones Industrial Average

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Source: MetaStock

Arms Indices

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Source: MetaStock

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SunTrust Banks: Buy

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Source: MetaStock

Monday's market massacre left few stock charts unscathed.

But even with that background, the banking stocks tended to act relatively well. We have looked at a number of regional banks recently, and they still look good. Here is a money center bank that is also looking attractive. SunTrust (STI - commentary - Cramer's Take) has moved higher, with each advance on better volume, and each decline has been on lower volume. The moving average convergence/divergence (MACD) is crossing to the plus side. This stock looks like a buy around current levels. The lower ascending trend line could be used as a danger level in placing a protective stop-sell order

(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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UCB Holdings: Buy

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Source: MetaStock

UCB Holdings (UCBH - commentary - Cramer's Take) is another banking stock, this time a regional, that looks much better than the market. The slow and steady turn from a downtrend to an uptrend in the last few months has the appearance of a typical saucer bottom. In September, a sudden advance on volume broke it out above resistance in a convincing manner.

It has pulled back a little in response to the weak market, but not very much. When and if things start to improve, it should participate well. The stock looks as though it could be bought right around here.

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JPMorgan: Buy

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Source: MetaStock

On June 18, JPMorgan was suggested as a buy. Since then, it has moved higher on volume a number of times, and then pulled back part way on lighter volume. The MACD has now gone positive again, and the stock is acting far better than the market. It still looks as though it is headed higher. If it was not bought back in June, it does not look to be too late to do so now.

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Atmel: Buy

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Source: MetaStock

Atmel (ATML - commentary - Cramer's Take) is a lower-priced technology stock that comes to my attention because it looks so different than most stocks at this time. Four days ago, it jumped higher with very heavy volume reversing a downtrend. That caused a crossover in both the MACD across the top of the chart, and in the two volume-adjusted moving averages that overlie the price plot. It has, understandably, pulled back in the last two days, but it looks as though it should be able to go higher, especially if the markets stabilize.

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At time of publication, Arms had no positions in the stocks mentioned.

Richard Arms is a renowned stock market technician who invented the Arms Index (often referred to as the TRIN), which has become a mainstay of market analysis, appearing in The Wall Street Journal and Barron's. Arms also developed the widely used technical method Equivolume Charting. Since 1996, he has been publishing the Arms Advisory newsletter for money managers and financial institutions. He also has authored Stop and Make Money: How to Profit in the Stock Market Using Volume and Stop Orders, Profits in Volume, Volume Cycles in the Stock Market, Trading Without Fear and The Arms Index, and has been honored with the Market Technicians' Award for Lifetime Contribution to Technical Analysis. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Richard appreciates your feedback; click here to send him an email.

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