Bear Market Rally Provides Selling Opportunity

With the indecision of the last few days of trading, up one day, down the next, etc., it appears that the markets are having a great deal of trouble getting much of anything going. However, the Arms Index moving averages are somewhat oversold on a short-term basis.

Therefore, it looks as though we may see a bit more on the upside over the next few days. But a rally here would look more like a selling opportunity than an encouragement. I have been saying that the rally that began three weeks ago is running out of energy at this point.

A particularly bothersome aspect is the fact that the long-term chart, shown below, implies resistance very near to where we now are. This is a weekly chart of the S&P 500 going back about ten years. It is apparent, I think, that we entered a bear market last October, and that the current rally is a rally within that bear market. The downtrend of the bear move is defined by the pair of trend lines at the far right. Right now we are crowding the upper limits of that downtrend. As I said above, the short-term work is saying we can rally a bit more in here, but I do not see it carrying very far.

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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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Click here for larger image.

Source: MetaStock

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Aetna: Buy

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Source: MetaStock

The bottom that has formed in Aetna (AET - commentary - Cramer's Take) looks like a classic. Moreover, a number of the stocks in the healthcare plan group look attractive.

It had a heavy-volume washout low, after a gap. Then it traded higher before testing the low on light volume about a month later. The advance from there was on heavy volume with a widening of the trading range.

Now it has pulled back on lighter trading, and with a well-defined series of lower highs. This presents the opportunity to buy the stock on a stop order placed just above that small trend line. Should a resumption of the advance fail to materialize, the stock never gets bought.

(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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Coventry Healthcare: Buy

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Source: MetaStock

Coventry Healthcare (CVH - commentary - Cramer's Take) is another interesting stock in the healthcare plan group. It built a long base, much like Aetna. It, too, had a heavy-volume washout low, after a gap. It then tested the low area before moving higher on better volume.

The stock then broke out with good volume and a widening trading range. The current pullback looks as though it is presenting an opportunity to buy at a better level. As with Aetna, the trailing-buy-stop order could be used.

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Sun Healthcare: Buy

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Source: MetaStock

Sun Healthcare (SUNC - commentary - Cramer's Take) is yet another possibility in the same area as the two stocks above. I am especially impressed by the big up day just over a week ago. It left a big gap as it pushed up through an important resistance level. The heavy volume and wide trading range make it look like a power box, and suggests it will go higher. Plus, the pullback has taken the shape of a typical flag. When, and if, it goes through the top of that flag it will appear to be starting a new advance. That would look like the time to be a buyer.

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Tyco: Short

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Source: MetaStock

When a stock has been showing us heavy volume on the upside for a long period, and then volume suddenly comes in on the downside instead, it is a warning that a change has occurred, and says that the stock may be going lower. Such technical action can be seen in Tyco (TYC - commentary - Cramer's Take), above.

Also, we have crossovers to the negative side on the moving average convergence/divergence (MACD) and the two volume-adjusted moving-average lines. Those crossovers are highlighted by the ellipses on the chart. It looks as though the stock could be profitably shorted around current levels.

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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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