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This column was originally published on RealMoney on Sept. 23 at 8:00 a.m. EDT. It's being republished as a bonus for readers.

Hurricane Rita may not have done any damage to Texas yet, but it already has slammed the markets this week. The first three days of the week brought about the start of the decline we have been anticipating. Again, news events seem to be helping markets to fulfill moves that were signaled on a technical basis.

Thursday, as some hope of an amelioration of the pending disaster was sensed by traders, a rally got going. Interestingly, from a technical standpoint, the rally came in just about where it was to be expected. The


came down almost exactly to the lows of late August. The Arms Index numbers had become somewhat oversold, and the VIX had gone to 14.39, a level very similar to that touched on the August low.



penetrated the late August low three days ago, suggesting a further decline and hinting that the support in the Dow is ephemeral. The Nasdaq also found support Thursday at a level that could be interpreted as the bottom limit of the descending trend. So a short-term upturn could be anticipated.

After the big hit we've taken, it's nice to get some rallying. But I am afraid it will be of little consequence. I have been anticipating a drop ending late in September or early in October. We are not there yet in terms of the cycle, and I do not believe we are there yet in terms of price levels.

Understanding the MACD

A number of readers have asked for an explanation of MACD. This abbreviation stands for moving average convergence/divergence. It was developed by Gerald Appel, and it is one of the few indicators I use that I did not invent.

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The MACD line is the difference between a 26-day and a 12-day exponential moving average. Superimposed on the MACD line is a nine-day exponential moving average that acts as a trigger. In other words, when they cross over, they suggest either a purchase or a sale.

Notice the effectiveness of the crossovers on the charts that follow. The red line is the MACD, and the blue line is the signal line.

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.

ADC Telecom: Buy

More than two weeks ago,

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ADC Telecom

( ADCT) moved up on increasing volume and a widening trading range. It left a gap behind, and broke through the descending trendline. Then it built a small sideways consolidation before again breaking through resistance three days ago. All this looks like a legitimate turnaround. I have placed ellipses over the crossovers of the two volume-adjusted moving average lines and the MACD. I believe the stock could be bought 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


Meridian Resource: Buy

Meridian Resource

( TMR) is another interesting possible turnaround stock. It has made a base and now is starting to move higher. Notice the square Equivolume entries on the lows. This is a sign of support, as volume gets heavier but trading range tightens. Both the MACD and the moving averages have crossed to the plus side. At this point, it seems to be continuing to show strength rather than pulling back after the breakout. I am inclined to not wait for a pullback on this stock but to go in here.

Advanced Energy: Short

Advanced Energy


has broken support. Between July and September, it went from under $8 to almost $13. Now it has turned back down and looks as though it could be headed back to that July support level. It has moved rapidly downward with the markets in the last few days, so it is likely to rally in here. But I believe any rally on light volume would be an opportunity to sell at a better level.

USG: Short



has broken the ascending trendline. The MACD has gone negative, and the two volume-adjusted moving averages are about to confirm the crossover. Notice the big volume to the downside three days ago. That is the first time in months that the volume has been on a decline rather than an advance. The stock looks like a short sale right around here.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Meridian Resource and Advanced Energy to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

P.S. from Editor-in-Chief, Dave Morrow:

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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



. 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

Profits in Volume


Volume Cycles in the Stock Market


Trading Without Fear


The Arms Index

, and has been honored with the Market Technicians' Award for Lifetime Contribution to Technical Analysis. At the time of publication, he had no positions in stocks mentioned in this report, although holdings can change at any time. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Richard appreciates your feedback;

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