Patience During Advance May Pay Off

After the huge advance on Monday, Tuesday's hesitation should come as no surprise. After the extreme bearishness of the prior week, it is surprising it has not given back more.

In my column a week ago, I said that it was about time to ignore the rampant fear and go in the direction of the fleeing masses. The rally on Monday seems to justify that viewpoint.

What we have seen has all the earmarks of a traditional selling climax. We had the heaviest volume in history on the Nasdaq, and the third heaviest on the NYSE. We had immense volatility, and a dizzying plunge, followed by an equally staggering advance. We had very oversold readings on the Arms Index, especially on the Nasdaq AI. It was the anticipated "blood in the streets" that usually ends a bear market.

Does that mean all is rosy now? Hardly. Turning points get tested, often a number of times. But the current lack of belief, plus the fact that we have not become overbought on my indicators, suggests the advance will go further, short-term, and will eventually go higher, longer-term. Do not be in too much of a hurry to get out with a quick profit.

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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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Bank of America: Buy

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Source: MetaStock

The past few weeks, I have suggested that the banking stocks have been acting better than other segments, and looked as though they could move higher if the market turned up. Bank of America (BAC - commentary - Cramer's Take) came down last week, on both a poor earnings report and a dismal market. But it came down to just where support was to be expected, because that was the July support level.

Once there, volume became very heavy, but the trading ranges contracted, producing square Equivolume entries. Such activity suggests an up move is likely. Note also that the two volume-adjusted moving-average lines have crossed to the plus side. The stock looks like a buy here.

(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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3COM: Buy

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Source: MetaStock

3Com (COMS - commentary - Cramer's Take) has held up very well in the declining market of the last few months. The March low was tested, but not penetrated in either July or more recently. In September, it ran up on heavier volume and penetrated the previous level of resistance. It has to overcome a resistance level just above its current price. A buy-stop order just above that level would be a good way to get in when it is moving in a favorable direction.

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Provident Bankshares: Buy

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Source: MetaStock

Provident Bankshares (PBKS - commentary - Cramer's Take) is a regional banking stock that may be starting a turnaround. We went through the decline stage earlier in the year, followed by base building since July, and then a sign of strength at the end of September.

Since then, in sympathy with the market, it has fallen back on lighter trading. It has formed a downward flag, which gives us the opportunity to wait until it strengthens again before moving into it. If it decisively penetrates the descending trend line with heavier volume, that would look like the time to be a buyer.

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Arkansas Best: Short

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Source: MetaStock

Arkansas Best (ABFS - commentary - Cramer's Take) was up when the markets were going down, but now it looks as though it is about ready to move lower. After building a sideways area, it broke support last week with increasing volume and a widening trading range. In the last two days it has attempted to rally, but the volume has been disappointingly light. The moving average convergence/divergence (MACD) and the moving averages have both gone into negative territory. It looks as though it could be shorted around current levels.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Provident Bankshares to be a small-cap stock. 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.

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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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