Increase In Fear Is a Positive for Market

Tuesday's performance by the stock markets was distressingly poor.

That was the first sentence of this column two days ago. Now we are seeing even more bothersome action. The drop Thursday was significant for a number of reasons.

The most obvious is the fact that we took a big hit in all the averages. But within that, we see more. The first chart below compares the Dow to the Nasdaq and the S&P 500. One might argue that the drop in the Dow did not decisively break support. But the other two markets belie that conclusion. The Nasdaq, especially, is under tremendous pressure.

Actually, this break may be the start of what we have been looking for, and what the market needs, in order to start to act better. For the first time in months, we saw some real fear, as reflected in the big readings for the Arms Index.

I have maintained for weeks that the trouble with the July low was that it did not have the big volume and the rampant fear that is usually seen on important bottoms. But the NYSE Arms over 2.00 and the Nasdaq Arms over 4.00 for much of the day show a sudden rush for the exits that may get it done.

Don't try to catch a falling anvil, but be ready for a buying opportunity.

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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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Dow vs. S&P 500 vs. Nasdaq

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Source: MetaStock

Arms Indices

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Source: MetaStock

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MBIA: Buy

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Source: MetaStock

One of the strongest longer-term formations is the saucer bottom. It represents a gradual transition from liquidation to accumulation. Since it produces a wide bottom, it sets the stage for a more lasting advance.

That is what we are seeing develop in MBIA (MBI - commentary - Cramer's Take). Last week, it broke out in a very convincing manner. Heavy volume came in as it gapped to the upside, and then continued to move higher. Since then, it has moved sideways on lighter volume. In that the markets continue to act poorly, I would be inclined to watch and try to buy this stock when and if it pulls back a little more.

(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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Conn's: Buy

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Source: MetaStock

Conn's (CONN - commentary - Cramer's Take) is another stock that has built a wide base and then moved up out of that base. It has spent all of this year oscillating between the low teens and the high teens, but an encouraging characteristic has been the fact that the volume has tended to increase on each advance and decrease on each pullback.

Now, after the breakout, volume has dried up as it has hesitated. It is forming a small downward-sloping flag. A stop-buy order could be placed just above the top of that flag, moving it lower if the pattern moves lower, and cancelling the order if a new up moves fails to materialize in this neighborhood.

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Alpha Natural Resources: Short

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Source: MetaStock

The converging tops and bottoms in Alpha Natural Resources (ANR - commentary - Cramer's Take) formed a big triangle. Now we have resolved that standoff with a break to the downside. Volume has tended to come in on declines rather than advances, which was another sign a top was forming after a substantial advance.

The moving average convergence/divergence (MACD) lines have just crossed to the minus side, and so have the two moving average lines. Also, it has now broken a support level, and looks as though it is headed lower. I think it could be sold short around these levels.

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OSI Pharmaceutical: Short

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Source: MetaStock

Here is a stock that looks as though it is now headed lower. OSI Pharmaceutical (OSIP - commentary - Cramer's Take) had a big advance from June to August, with nice upside volume. Now, however, it has turned down enough to penetrate the ascending trend line. The MACD across the top of the chart has crossed to the negative side, and so have the two moving average lines that overlie the price plot.

Since the sign of weakness, it has formed a typical upward-sloping bear flag. On Thursday, it broke down through the lower limits of that flag, so it looks as though the stock could be shorted at 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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