Trading Conditions Starting to Stabilize

Somewhat calmer trading conditions have developed in the last few days. That is encouraging, in that big volatility is an earmark of market bottoms. I like to measure the emotionalism of the markets using Absolute Percentage Change, a calculation that I introduced in a Barron's article earlier this year.

The second chart, below, shows this indicator in the form of a five-day moving average. Note that it has retuned to a more normal area after the extremes of the last three months. That suggests we are moving toward a less erratic market.

After the nice breakout over a week ago, the markets have had a lighter-volume pullback that has taken the form of a flag. Now it looks as though we may be starting to move out of the top of that flag. It still looks as though the long side is the place to be at this time.

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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 Industrials Metastock

Metastock

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Prudential Financial: Buy

Metastock

A key to forecasting the future movement of a stock is an observation of how the volume is coming in. If, as in Prudential Financial (PRU - commentary - Cramer's Take), shown above, volume has been coming in on down moves but then shifts and starts coming in on up moves, it is a sign of new investor interest in owning the stock. In this case, the better volume has also been a part of a move through a prior level of resistance. Moreover, the descending trendline has been broken. The small pullback of the last week gives us an opportunity to buy at a slightly better level. I think it could be accumulated around this level.

(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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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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