Indicators Suggest a Bottom Is Forming

It has been a difficult struggle in recent days. The markets fight for hours to slowly move to gains, only to suddenly give it all back in a matter of minutes. But the fact that we are still holding above the Oct. 10 lows is important, and the volume is lighter than it was at that time. Such action is typical of a very discouraged and dysfunctional market. But so far, it still looks as though the broad sideways area of the last five weeks is a precursor to a turn to the upside.

We have repeatedly noted in recent columns how oversold the Arms Index numbers have become. But there are other indicators that are giving much the same message. The second chart below shows the monthly volatility. This index merely observes the average daily percentage changes in the Dow during each month.

The current huge move in this index takes it to levels not seen since the panic of 1987. That reading was based on just a few anomalous readings, whereas this time, it is based on a great number of consecutive readings. The current level suggests we are at a market extreme, and that a major market bottom is at hand.

---

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.

---

Dow Jones Industrial Average

Click here for larger image.

Source: MetaStock

Percent Volatility

Click here for larger image.

Source: MetaStock

---

AT&T: Buy

Click here for larger image.

Source: MetaStock

I was early in my Sept. 8 suggestion to buy AT&T (T - commentary - Cramer's Take). With the sick market, it, too, went lower.

But the chart is still one of the most encouraging we can find at this time. Notice the uptrend in the face of a very hesitant market. In a market rally, this stock looks as though it could do very well. The moving average convergence/divergence (MACD) and the moving averages are both in positive territory. Accumulating some of the stock around current levels seems like a good move.

(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.)

---

JDA Software: Cover Shorts and Buy

Click here for larger image.

Source: MetaStock

On Aug. 8, JDA Software (JDAS - commentary - Cramer's Take) was suggested as a short sale. Now, after a substantial decline, it is acting as though it is going to go higher. In spite of market weakness, it has put in a series of higher lows. The downtrend has been decisively penetrated. The last two rises have been with heavy volume, and the pullbacks have been with light volume. The width of the base justifies a good advance. It appears to be timely to cover the short positions, and go to the long side.

---

First Energy: Buy

Click here for larger image.

Source: MetaStock

The electrical utility stocks are among the stocks that have been acting fairly well in spite of the soft market. First Energy (FE - commentary - Cramer's Take) has a very attractive chart. Notice the washout low, followed by two tests of that low, each at a higher level and each on lower volume. It has broken the steeper descending trend line, and is approaching the longer-term downtrend line. The stock looks as though it could be bought around current levels.

---

Finish Line: Short

Click here for larger image.

Source: MetaStock

With the markets down this far, there are few stocks that look like new short-sale candidates. But Finish Line (FINL - commentary - Cramer's Take) is one that held up better than the market earlier this year, and has now turned weak. The recent decline took it down to where it looked as though it might find support at the October lows. But on Tuesday, it broke through those lows, making it look as though it is headed lower. MACD has gone back to the negative side, and so have the volume-adjusted moving average lines. It looks like a sort around current levels.

---

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Finish Line and JDA Software to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

---

Know what you own: Arms mentions First Energy. Other companies in the utilities industry include Southern (SO - commentary - Cramer's Take), Dominion and Duke Energy (DUK - commentary - Cramer's Take).

---

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.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.