This column was originally published on RealMoney on Oct. 10 at 11:36 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.No doubt about it, this is a tough market environment. The major averages have been trending lower since early August. Sure, we've seen a few rallies over the past couple of months, but they haven't led to anything other than frustrating selloffs. Just when folks start to believe in the bull, it wimps out. Blame it on hurricanes Katrina and Rita, high oil prices, rising rates, seasonality or whatever else you can think of. It really doesn't matter which scapegoat we choose; the market just remains ugly. But last week's bearish trading action might be more significant than past declines. Specifically, Thursday's high-volume selloff could turn out to mark a short-term bottom. Let's look at a chart of the S&P 500. Notice how Thursday's intraday decline was halted by strong buying, pushing the S&P back above 1190? While Friday's close was just slightly higher than Thursday's, it was significant. If this low holds for the next few days, expect buyers to start stepping up to the plate. After all, the money that had been buried in oil stocks has to be put back to work. A firm market environment should start pulling in more buyers. Let's look at the flip side. A break of support implicates very aggressive selling. In that case, I'd be very careful about opening any new positions. Most stocks move with the ebb and flow of the market, so you'll want to have a very good reason for buying in a declining market. Let's look at a few charts of stocks that might work here.
AU Optronics ( AUO) has fallen back to its March lows and it looks like deja vu all over again. Last time the stock fell to this level, it bounced up to around $13 and then retested the bottom. But ample buying interest halted the decline and forced the bulls to chase the stock higher. Now, the stock is back at prior support. After pushing as high as $13, AU has fallen back to support. The battle line is drawn around $12. If that level were to fall, I'd expect most of the current dip buyers to sell their stock and cut their losses. But if support holds again, the odds of another rally increase dramatically. At this level, I'd dip a toe in the water and buy some shares -- with a stop just beneath support.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Charlotte Russe Holding 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 TheStreet.com Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to TheStreet.com RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.