Getting Oversold in a Quiet Period

Ever since the big panic selling day of Dec. 1, we have had a very apparent calming of the markets. On that key day the Arms Index was over 10, giving us the second-biggest reading in history and suggesting that a great number of weak holders were being washed out. Now we are moving sideways, with lighter trading and less volatility.

During this quieter period, though, we have seen the Arms Index moving averages move to more oversold readings. On the second chart, below, I have inserted horizontal blue lines to indicate the current levels of the five-day and 10-day moving averages. You will note that, in relation to the last couple of months, they do not look very extreme, but if we go back before that for our comparison, we see that we are really quite oversold. The implication is that, if we have returned to more normal trading, we are in an area from which a market rise is to be anticipated. It still looks like a time to be buying stocks.

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Dow Industrials Metastock

Arms Index Metastock

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Apple: Buy

Metastock

After a suggestion to short Apple on June 4, it was suggested, on Oct. 31, that the stock be bought. That turned out to be a premature call, since it is lower now than it was then. Nevertheless, it appears to be in a wide basing area. Volume has tended to come in on the up moves recently, and we are near support. I think long positions can be held or added to and new long positions could be initiated around these levels. I would want a stop loss order just under the November low.

(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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Northeast Utilities: Buy

Metastock

Since late October, the utilities have looked as though they were likely to move higher, and they were suggested as buys at that time. Most have gradually advanced, but they look as though they have far further to go. Northeast Utilities (NU - commentary - Cramer's Take), shown above, has built a wide base with a series of ascending lows. It looks as though it is headed higher, but it needs to break through the November and December highs. I would be inclined to buy some here and round out the position when and if it makes such a breakout with impressive volume and a wider trading range.

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Honeywell: Buy

Metastock

Honeywell has acted well since Nov. 5, when it was suggested as a long position. The gap breakout looked particularly impressive. We are seeing volume coming in on the upside, whereas prior to November the volume was coming in on the down moves. The MACD across the top of the chart is positive, and so are the two volume-adjusted moving averages that overlie the price plot. The width of the base suggests that a substantial advance is likely. It does not appear to be too late to be buying this one.

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Archer Daniels Midland: Sell

Metastock

Archer Daniels (ADM - commentary - Cramer's Take) was recommended as a buy on Nov. 5. It has had a good advance, but now it may be encountering resistance. Note a few things here. The base that generated the advance was not very wide, and it seems to have been pretty much used up. The MACD across the top of the chart is starting to go negative. The volume recently, as it went higher, was far from impressive. The uptrend is not yet broken, but traders who bought back in November might want to nail down the profits. It is too early to go short, however.

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Know What You Own: Competitors of Archer Daniels Midland include Bunge (BG - commentary - Cramer's Take) and Corn Products (CPO - commentary - Cramer's Take).

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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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