By Chip Hanlon 

OK, things are getting overdone to the downside in the near term. The Fed muddied the water a little bit this morning with its panic--ahem--emergency interest rate cut; if it had to cut, I wish Bernanke and company would have waited a day or two, allowing the market to get washed out in a huge downdraft today, but we're still oversold enough that it's time to start thinking about what to buy.

Why do I say we're finally getting deeply oversold? Not only are sentiment indicators moving further towards fear (witness today's spike in the VIX index), but another gauge has reached an unusual level, the Bullish Percent.

This indicator comes originally from Point and Figure technical analysis, but its measurement is pretty simple: it measures the percentage of stocks in positive technical trends, and it tends to range between 30 and 70%.  When near 70, it means nearly ¾ of the market's stocks are in positive technical patterns, meaning any rally is getting long in the tooth.  Conversely, when the Bullish Percent gets down near 30%, then most stocks have broken down, meaning that most of the money that wants to be out is already out--supply (selling) is getting exhausted.

Currently, this indicator is all the way down at 20%, a level seen only twice in the last 10 years--in August of 1998 and April of 2000.  In the first instance, it represented a long-term buying opportunity despite extreme fear following the meltdown of LTCM and the Russian default; in 4/2000, it led only to a short-term rally following the Nasdaq's first collapse, but that rally was a big one--nearly 50% over just 3 months or so.  How will this one play out? I'm concerned it may only be a short-term opportunity given economic fundamentals, but we can take that as it comes.

So, if you accept that we're getting close to a very interesting buying opportunity, what should you look to buy?  I have two words: relative strength.

On CNBC last week, I described how low quality stocks rally at the end of bull markets. Conversely, the stocks you can expect to rally first will be the ones that got sold last, that held up best throughout the downturn.

Groups showing good relative strength now include coal, utilities and biotechs (surprising).  And although they have been beaten up a little bit more recently due to the big runs they had, I'd suggest keeping an eye on agriculture since that fundamental story remains so compelling.

Bottom line: don't panic.  Keep your wits about you and start looking for the first trains that will be leaving the station on the next rally.

*One other thing: it's also not a bad time to already start harvesting tax losses, as I wrote about in the Columnist Conversation section today over at RealMoney.com.