A Bounce for the Quick

There is a great deal of volatility developing in the markets, but that does not mean a great deal of progress, either up or down. However, the wide swings day-to-day, and even intraday, in the last few sessions have added up a continuation of the downtrend that began in mid-October.

In the S&P 500 we have broken the uptrend line, going all the way back to the March low, saying that a major change has occurred. The uptrend has now become a sideways area. So on a longer-term basis, it is not a time to be a buyer.

But, as can be seen on the first chart below, we are getting close to the early October support level. The fact we are nearing that support implies a bounce in the offing, and probably a big enough bounce to justify long positions, but only on a more speculative, short-term basis.

Supporting the idea of an imminent bounce is the Arms Index. The moving averages, shown on the second chart, are quite oversold. In the context of recent market activity, that can be expected to lead to an upward move on a short-term basis. With the rapid recent swings implying indecision after the decline, traders could, I believe, do some buying in here, but they should be protecting positions with stops and should be careful not to overstay the market when the expected rally seems to start fading.

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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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S&P 500 Index Metastock

Arms Index Metastock

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ConocoPhillips: Buy

Metastock

It looks like a good time to be considering the major consolidated oils as possible buys. As a group they are acting far better, reacting to higher oil prices and breaking through resistance. ConocoPhillips (COP - commentary - Trade Now), shown above, and the next stock, below, are two that I particularly like. The good upside volume through resistance has been followed by a pullback, taking the form of a flag. By placing a stop buy order just above the top of that flag, one could buy the stock only when, and if, it resumes its advance.

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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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