Indicators Suggest More Upside Ahead

The "Paulson effect" still seems to be with us, but it is losing its effectiveness. In recent weeks Henry Paulson has seemed like the stock market's own Typhoid Mary. Every speech has been followed by a plunge in prices. But yesterday the response was far more muted. It looks as though underlying market strength is starting to emerge. After a rise of almost 1,000 Dow point in just two days, a rest was to be anticipated. The fact that it has been so contained is, in itself, encouraging.

Last week I was saying that the drop through the Oct. 10 low, while bothersome, seemed to be finding support. The subsequent sharp rise makes the validity of the double bottom look even more believable.

The very oversold shorter-term Arms Index moving averages have moved away from their extremes but are still oversold enough to suggest that the advance is going to go further. The longer-term Arms Index moving averages are still very extreme, and this bodes well for the longer-term outlook.

It is early, but it looks as though we may have turned the corner.

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Dow Jones Industrials

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Source: MetaStock

Arms Indices

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Source: MetaStock

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Rayonier: Buy

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Source: MetaStock

Here is a stock that has acted better than the rest of the market recently, and it looks as though it is headed higher. Rayonier (RYN - commentary - Cramer's Take) did not go to a new low last week, and now it has shown very impressive volume to the upside. It has broken out through the top of the consolidation. MACD is positive, and so are the two volume-adjusted moving averages. I would not be surprised to see a little more pulling back on lighter volume over the next few days, and I believe such a pullback would be a buying opportunity.

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At time of publication, Arms had no positions in the stocks mentioned.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider PETS 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.

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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