Some Order Returns to the Markets

In July, August and September, the Street was looking for a selling climax to end the decline. But then in October, with the apparent collapse of Western Civilization being reported in the media, those same prophets were also panicking, despite the fact the exact thing they had been looking for was occurring.

Washout lows are characterized by rampant fear, heavy volume and huge volatility. They are then tested a number of times, in the midst of continuing disbelief. That sure looks like what we have been through. The next stage should be a further rise in the face of continuing anxiety, and then, when the Street becomes confident the worst is behind them, another test of the lows.

At this time, we are still moving well. The Arms Index numbers have not become overbought, in spite of the rally, suggesting it has further to go. Volatility has suddenly eased, and some order seems to be returning to the marketplace. If you were able to ignore the madness of crowds, and buy near the lows, I am suggesting holding the positions. If you are out, there seems to still be room on the upside to do some buying.

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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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Petrohawk: Buy

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Source: MetaStock

In the last two weeks, I have been mentioning a number of the oils and gas exploration companies as possible buys. Petrohawk (HK - commentary - Cramer's Take) is an independent oil and gas company that has an intriguing chart.

From July until just recently, each decline has been accompanied by heavier volume. Now, however, the volume is coming in on the up moves. The moving average convergence/divergence (MACD) and the volume-adjusted moving averages have both crossed to the positive side. It looks as though it is staging a turnaround, and could be bought 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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Honeywell: Buy

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Source: MetaStock

In September, Honeywell (HON - commentary - Cramer's Take) broke support decisively, and then slid rapidly. In October, though, with the market, it had a climactic low, and then a test of that low on much lighter trading.

In the last few days, it has started to move higher. The descending trend line has been penetrated. MACD is already positive, and the moving averages are just confirming that crossover. I would look for a small pullback in the next few trading days as a buying opportunity. A stop-loss order could be entered just below the double bottom.

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Great Plains Energy: Buy

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Source: MetaStock

Another group I have been suggesting in the last two weeks, and still like, are the electric utilities. One you might want to consider is Great Plains Energy (GXP - commentary - Cramer's Take). Notice the heavy-volume climactic low, followed by two tests at higher levels, on lower volume. In the last few days, it has formed a small consolidation. With all the indicators looking positive, this stock appears to be a buy, but to be sure, one could wait, placing a buy-stop order just above the top of the consolidation. In that way, it only gets bought if the advance resumes.

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Transocean: Buy

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Source: MetaStock

Transocean (RIG - commentary - Cramer's Take) is another oil and gas driller that looks as though it is turning up after a long decline. Since June, it has lost over half its value. It had a washout low after a gap in October, and tested that low twice. Now it is showing strength. I would expect and look for a small pullback in the next few days, and if volume dries up on such a pullback, it would look like a good time to be buying.

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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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