Only once or twice in any generation are the markets devastated by a tsunami such as we have just seen. But out of adversity comes opportunity. I was fortunate to have been around and participating in the 1974 low and the 1987 low. Both were panics, and both were fantastic buying opportunities. This time it looks very similar.

After the huge volume panic washout last week, we had a big run-up, and now a pullback toward those lows. But the key seems to be that volume is much lower, which is a classic test. Moreover, we have volatility at record levels, and the Arms Index is now extremely oversold on both the NYSE and the Nasdaq.

It is difficult to buy when all about you are panicking, but it is always difficult to ignore the prophets of doom at times of great opportunity. I think it is time to hold your nose and do some buying with the money you should have been holding back since we turned bearish almost a year ago.


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.


Dow Jones Industrial Average
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Source: MetaStock

Arms Indices
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Source: MetaStock


(A note about the stocks shown below. After the huge break, there are almost no good looking charts, only "less ugly" charts. However, it appears to be far too late to be selling, and a time to be buying. Therefore, I am showing only buys, and am trying to pick the least ugly.)

Huntington Bancshares: Buy

Click here for larger image.
Source: MetaStock

Huntington Bancshares ( HBAN) was suggested as a buy on Oct. 2. I am repeating it here because it continues to act well in a miserable market.

Notice the increasing volume on each rally since the low was made in July. The width of the base justifies a substantial advance. The rally earlier this week was enough to push it through the top of the downward flag that had been forming.

On the earlier recommendation, I suggested putting in a stop-buy and waiting for a breakout. It now looks as though it could be bought 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.)


AMR: Buy

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Source: MetaStock

It looks as though the worst may be behind the airline stocks. AMR ( AMR) has been working higher since July and has only succumbed to the selling pressure on the overall market in the last two weeks. It has not gone to new lows, which is an exception at this time. Volume has tended to come in on advances and dry up on pullbacks. A better market should benefit this stock. I see it as a buy around current levels.


Blue Nile: Buy

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Source: MetaStock

Blue Nile ( NILE) has moved down to the old support level again. It is another stock that has held well in a bad market, and looks as though it could participate particularly well when the market turns higher. It has been building this base since February, and, as we know, the wider bases tend to generate the better advances.

I think the best strategy is to become a buyer when it turns higher, hence, a buy-stop order just above the top of the recent down flag would seem to be the way to go.


Toll Brothers: Buy

Click here for larger image.
Source: MetaStock

The much-maligned residential construction stocks could well be one of the best areas in a rebound. I particularly like Toll Brothers ( TOL). It did not go to new lows with the markets, but held above the July support. I would like to see a resumption of strength before buying, and would be inclined to use the strategy we have often looked at of placing a buy-stop order just above the recent downtrend.
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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