"The broad market, broke down sharply this past week, taking out the November lows in the process and generally spread severe gloom along the way," says technical expert David Nassar.
In his Marketwatch Options Trader, he reviews the technical state of the market and looks at MF Global (NYSE: MF) and Sprint (NYSE: S) -- two "highly-speculative stocks that have bucked the downtrend."
"As a result of the market breakdown, selling was heavy and the market became very oversold. Thus, short-term, oversold rallies are possible, but a true intermediate-term bottom does not seem to be at hand.
"The $SPX chart is quite negative, with $SPX having broken down through two important support levels in the last two weeks (first, the support at 805-810, and now the support at 740 -- at the November lows).
"Moreover, there is still resistance at 780 on the $SPX chart, which repelled several rally attempts before this breakdown occurred. The index declined swiftly, though, so it is quite a ways below its declining 20-day moving average, which is currently just above 785.
"Market breadth has been extremely negative and it is in this area that the oversold condition shows up most vividly. Similar measures, such as breadth oscillators, a count of new lows vs. new highs, recently reached depths of selling of nearly historic proportions.
"It wasn't as severe as last October-November, but it was more severe than almost any other market in history. As a result, sharp but short-lived rallies are possible at any time. However, it will take several days of positive breadth to actually generate intermediate-term buy signals.
"In summary, the market is very oversold -- mostly from the viewpoint of how fast it's dropped and how bad breadth is. However, sentiment measures (put-call ratios and $VIX) have not responded.
"To us, this indicates that the market is actually somewhat complacent, even after this huge decline. Nearly everyone is trying to pick the bottom and trade the oversold rally, rather than worrying about further losses on the downside.
"We could be wrong, but we don't expect a true intermediate-term buying opportunity until sentiment reaches more bearish extremes.
"Meanwhile, out latest recommendations are low-priced, highly speculative stocks that have bucked the recent downtrend. Financial firms have been among the hardest hit stocks, as everyone knows. However, that is a broad category.
"Banks, insurance companies, and brokerage firms all fall under that sector, but each has much different problems. MF Global, which provides execution and clearing services for exchange-listed future and options, has been rallying since December, and is up about 100% since then.
"That certainly bucks the trend of just about everything else. It held up very well in the last two weeks, while the broad market got slammed. Stock volume patterns are positive, and trend lines are moving higher.
"Therefore, we think the stock or its options can be bought. Buy 8 MF Mar 2.5 calls at a price of 1.75 or less. If bought, stop yourself out on a close below 3.50.
"In addition, telecom operator Sprint lost over 90% of its value from the 2007 peak to the 2008 low. But, like MF Global above, it has rallied strongly since December -- more than doubling since those lows. Stock volume patterns are very strong, and the trend lines are pointing upward.
"In both S and MF, one could merely buy stock and not bother with options, since both stocks are so low-priced -- lower than some options we buy. However, since this is an option letter, we will recommend the option: Buy 16 S Mar 3 calls at a price of 0.50 or less."
