The Underlying Force of the Oversold Numbers

 | Nov 01, 2012 | 7:00 AM EDT
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This article also appears on Real Money Pro.

As usual, the market is doing the unexpected -- at least from the viewpoint of very logical market fundamentalists. The consensus was that we would see a flood of selling after Hurricane Sandy's damage and the trading hiatus. 

Instead, markets opened strong and even the subsequent pullback was mild. But the underlying force was the very oversold numbers. In the last week, enough stock was emotionally dumped to create a countercurrent, regardless of the news.

Little has changed in the single day since my last advisory. Conditions are still oversold enough to suggest a rally quite soon. I had been looking for support to appear in the S&P 500 around 1395. It has not yet gotten there, but we are close. So, yes, we could back off a bit more, however, the technical factors are saying, on a short-term basis, the worst of this first drop is behind us. 

Remember, I am only saying the immediate future. Enough technical damage has been done to warn of more downside after a rally. Only the most aggressive should try to play the long side for the anticipated rally.

S&P 500
Source: MetaStock
The Arms Index
Source: MetaStock

(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.)

Peabody Energy: Buy

Peabody Energy (BTU)
Source: MetaStock

Wednesday, we looked at Arch Coal (ACI) because of the breakout from a saucer bottom. Peabody Energy (BTU) is another of many coal stocks that looks attractive for the same reason. Note the heavy volume as it pushed higher last week. The wide base formed since June could justify a sustained rise. I would anticipate a small pullback on lighter volume here, and would be inclined to treat such a pullback as a buying opportunity.

Home Depot: Sell

Home Depot (HD)
Source: MetaStock

Rebuilding after the damage of Sandy seems logical, and would suggest buying stocks like Home Depot (HD). But the technical picture makes such logic suspect. Wednesday the stock did rally, but only within the consolidation that appears to have been forming for nearly a month. It has broken two ascending trendlines with a little bit heavier volume indicating a downturn. The rally appears to be an opportunity to do some selling at a better level.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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