Near-Term Critical to Defining Bear Market

Tuesday's weakness was enough to move the averages out of the uptrend that had been forming since the climactic low two weeks ago. In that time, the shorter-term Arms Index moving averages went from an oversold level rarely seen before, to a quite overbought condition last weekend. So some pulling back was to be anticipated.

But the break we have seen is bothersome, in that it has so rapidly taken away so much of the gain, and it has been so sudden, that the Arms Index numbers are not oversold again. So we are now in a short-term downtrend, with little reason to look for a rally yet.

After coming off of a heavy-volume reversal, it is normal to see a steep advance, and then a test of that low. We are now in the midst of such a test. If the old lows hold, it will broaden the base and be very encouraging, but if the volume increases and the low of two weeks ago is decisively penetrated, it will be saying that we have merely seen a low, not the low. Moreover, it will say that we are definitely in a bear market, rather than just a sideway correction. So the next few days or weeks are critical.

We are in a market that can be very profitable for traders because of the big and quick moves. The Arms Index five- and 10-day moving averages have been very accurate in finding each of the swings. However, I do not think it is a time to be buying for the longer term. We are, at best, in a sideways consolidation, which is wonderful for traders, but we could easily see that change to a down market if the lows fail to hold.

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Quick Turn South Will Lead to Important Test

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Source: MetaStock

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Source: MetaStock

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Lam Research: Buy

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Source: MetaStock

Lam Research (LCRX - commentary - Cramer's Take) is showing us a change in volume emphasis. In the last quarter of 2007, it was sliding, with the heavier volume appearing on each decline, and the lighter volume days coming in on rallies.

Since then, in spite of the weak market in January, it has acted well, rallying on volume. The descending trendline has been penetrated and has gone above a prior resistance level with impressive volume and a wider trading range. It looks as though it could be a profitable buy 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.)

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Compton Petroleum: Buy

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Source: MetaStock

Compton Petroleum (CMZ - commentary - Cramer's Take) is a good example of buying on a pullback after a flag. It was suggested as a buy on Dec. 21, with the suggestion that a buy-stop order be placed above the top of the descending flag that had begun to form. The subsequent advance would have triggered such a buy. This methodology is expanded upon in my latest book, Stop and Make Money. Now the stock has again moved above resistance, and the width of the base suggests it could go a good deal higher. It does not appear to be too late to buy this one.

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Las Vegas Sands: Cover Shorts and Buy

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Source: MetaStock

Las Vegas Sands (LVS - commentary - Cramer's Take) was recommended as a short sale on Dec. 5. Now, after a nice decline, it appears to have found strong support, and then given us a sign of strength. That is reason enough, I believe, to at least cover short positions, and perhaps even go to the long side.

Notice the square Equivolume entries on the lows, and then the increasing volume and widening trading range on the subsequent rally. The moving average convergence/divergence (MACD) across the top of the chart and the two moving averages that overlie the price plot are crossed to the plus side.

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Enzon Pharmaceuticals: Short

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Source: MetaStock

A cascade to the downside seems to be the nature of the recent trading in Enzon Pharmaceuticals (ENZN - commentary - Cramer's Take). It was suggested as a short back on Dec. 12, as it broke the ascending trendline and then rallied on lighter trading.

Since then, it has repeatedly broken support levels, and each break has entailed heavier volume and a widening trading range. If you did not go short back in December, it does not appear too late to get on board.

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