Oversold Situation Must Still Be Resolved

The traumatic swings of the last few days, and, in fact, of the last two months, grab the headlines, and make one think that we are having a big market move. The reality is that we have been in a broad sideways action since early October, as can be seen on the chart below. Thursday, we moved below the lows of that range. This is certainly a disconcerting development.

In the process, there were a great number of swings in both directions. There were six distinct advances or declines of 200 Dow points or more during the day. In spite of the lower low, this looks like extremely nervous trading in the vicinity of the Oct. 10 lows.

We continue to see extremely oversold levels in most of our indicators. The second chart below shows the shorter-term Arms Index numbers, which continue to be very oversold. Moreover, the longer-term 21-day and 55-day moving averages are at levels not touched in many months, and we have not seen such high volatility in over 20 years.

In the face of so much negativity in the news, it is difficult to hold stocks, but it still looks as though the very oversold situation is going to soon lead to a better advance.

---

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

Arms Indices

Click here for larger image.

Source: MetaStock

---

Genuine Parts: Buy

Click here for larger image.

Source: MetaStock

Few stocks have held up in the down market as well as Genuine Parts (GPC - commentary - Cramer's Take). There is a tendency for volume to come in on advances and dry up on declines. Late in October, it broke out above an important resistance level with increasing volume and a widening trading range. Since then, it has pulled back, but has not weakened as much as the market. It looks as though it 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.)

---

Onyx Pharmaceuticals: Buy

Click here for larger image.

Source: MetaStock

Onyx Pharmaceuticals (ONXX - commentary - Cramer's Take) was suggested as a short sale on Aug. 13. From there, it lost about have its value, making a low in late October. The subsequent rally was enough to break the descending trend line. It also gapped upward with heavier volume, and the moving average convergence/divergence (MACD) has gone positive.

In the last two weeks, it has formed a small downward-sloping flag. If it can get through the top of that flag with better volume, it will look as though it is headed higher. A stop-buy order just above that line, as indicated, would seem like a cautious strategy for initiating a long position.

---

Public Service Enterprises: Buy

Click here for larger image.

Source: MetaStock

I have recently been suggesting long positions in some of the utility stocks. Here is another Public Service Enterprises (PEG - commentary - Cramer's Take). Notice the ascending lows since the Oct. 10 bottom. This is in contrast to most stocks that are back down to those levels. The MACD crossed to the positive side almost a month ago, and now the two volume-adjusted moving average lines are confirming the signal. The wide base justifies a substantial advance.

---

FPL Group: Buy

Click here for larger image.

Source: MetaStock

FPL Group (FPL - commentary - Cramer's Take) is another attractive utility stock. It too has that pattern of ascending lows, and it too has broken through the descending trend line going back to July. Note the heavier volume on each of the up moves, and the lighter volume on each pullback recently. MACD has gone positive and stayed there, and so have the two moving-average lines. This stock looks as though it could be accumulated around current levels.

---

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.