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Taking Advantage of the Fear

I don't see a lasting upturn, but there is room for good profit.
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"If you can keep your head when all about you are losing theirs..."  Kipling wasn't talking about the stock market, but it often applies. In recent days, the accelerating plummet has become such a rout that it is necessary to step back and look rationally and unemotionally at the numbers. The logical next support in the S&P 500 was 1825, and the market yesterday got just below that and then found some support. The 21-day Arms Index is at the most oversold level since last February, right on the bottom of that slide. Now, with all about us losing their heads, it seems like a time to be taking advantage of that rampant fear by judiciously buying stocks that have held well and even strengthened in the last few sessions. Such stocks give us an opportunity to easily ascertain protective stop levels and are likely to lead the way in a rally. I do not see a lasting upturn because of the damage done technically by the recent slide, but I do believe that there is room in here for good profit on the long side.

(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.)

RYLAND GROUP (RYL): Cover Shorts

The fact that the stock of Ryland Group is now showing a rising Relative Strength Index (the plot across the top of the chart) after being at an extreme oversold position prompts me to suggest taking profits on the short position established on Sept. 23. Yesterday, it showed signs of rallying but failed as the market weakened. Nevertheless, the very oversold market is a good reason to take the profit, but there is not enough evidence yet to justify going all the way to the long side.

DREW INDUSTRIES (DW): Buy

Yesterday's extremely fearful market opening gave us an idea, in many stocks, where support was emerging. Then, later, they held above those earlier lows as the slide repeated. That sets the stage for a potential trade in which the stop can be placed just below yesterday's low, limiting risk but setting up for a possible rally in an oversold market. Drew Industries, above, looks like such a situation. The base is wide enough to justify a good advance if the market cooperates.