Encouraging Action Suggests It's Still Buy Time

Tuesday's semi-holiday, lighter-volume trading led to what started out to be a dismal session of lower prices and general apathy amidst fear. But later in the day, it looked as though the sellers had run out of strength, and the Dow regained much of its loss, before giving much of it back again. But the point is that the drop was not based upon intense selling, it was based upon a lack of aggressive buyers.

Looking at the first chart below, this seems to have been yet another light-volume pullback, testing the heavy-volume low of Oct. 10. One or more tests of a major low, over a period of weeks are very typical of a market reversal. Therefore, the current action is not only to be expected, but is encouraging. It broadens the base and continues the series of higher lows.

The second chart emphasizes my contention of the very oversold current condition. Both the five-day and the 10-day moving averages of the Arms Index are at rarely seen levels. Such readings usually only come in at, or very close to, important market bottoms. It looks like a time to be buying, not a time to be selling.

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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 Jones Industrial Average

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Source: MetaStock

Arms Indices

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Source: MetaStock

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BP: Buy

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Source: MetaStock

BP (BP - commentary - Cramer's Take) is a major integrated oil company that looks as though it is headed higher. I have inserted a vertical line on the above chart that separates the decline, with its continuing downside volume from the turn to the upside and the change in emphasis toward volume coming in on the upside.

Since it gapped up two weeks ago, it has moved sideways, but has ignored the weak market. The moving averages and the moving average convergence/divergence (MACD) are telling us the stock it trying to go higher. I see the stock as a 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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ArcherDanielsMidland: Buy

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Source: MetaStock

ArcherDanielsMidland (ADM - commentary - Cramer's Take) lost about half its value between May and October. Now it has turned upward in a convincing manner. After a move through the descending trend line two weeks ago, last week it gapped upward again with good volume. That led to a square Equivolume entry, however, so some pulling back was to be expected. It did, in fact pull back a little in the next few days.

That pullback now seems to be behind us now, so I think the stock could be bought around current levels.

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Home Depot: Buy

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Source: MetaStock

It again looks like a good time to be on the long side of Home Depot (HD - commentary - Cramer's Take). Since the low on Oct. 10, along with just about everybody, it then built a nice base, and has broken out to the upside.

The pullback of the last seven trading days had produced a typical lighter-volume downward-sloping flag. A move through the top of that flag would suggest a resumption of the advance, and be a buy signal. Therefore, a stop-buy order placed just above the flag and following the pullback lower, would seem like a good way of being there when and if the advance resumes.

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Lowe's: Buy

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Source: MetaStock

It is interesting that Lowe's (LOW - commentary - Cramer's Take) is giving us an almost identical chart picture as we saw in Home Depot above. It too has favorable MACD and moving averages. It too had a washout low, and then tested it on lighter trading. It too has broken out from a base and then pulled back on light volume. I feel a similar strategy of placing a buy-stop order above the top of the flag would be a good way of getting into a long position.

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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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