Contra Rally Alert

October 25, 2000
Kevin Haggerty

The 3:00
p.m. Monday rally in the NDX 100
(
NDX |
Quote |
Chart |
News |
PowerRating) and the S&P 500
(
SPX |
Quote |
Chart |
News |
PowerRating) carried over early yesterday. Both
indexes gapped up slightly on the open and ran. The papers and chemicals came
out of the gate strong. They ended the day +7.2% and 5.5% respectively on
Generals’ volume. The banks and brokers were also green early while the MSH,
dragged down by the semis, and the SOX, hurt by National Seminconductor, were
both red. The MSH closed -2.7% and the SOX -7.8%.

The chosen ones were mostly
green in Instinet pre the real-world opening at 9:30 a.m. but most turned soft
by 11:00 a.m. while the NDX hit the intraday high of 3481, with the S&P 500
topping right at the 80% volatility band. The band was 1415.84 and the actual
high was 1415.64 on a narrow-range reversal bar. From there, the S&P 500
traded down to an intraday low of 1388. The average implied volatility for the
SPX was 21.45.Â

By calculating your
volatility bands every day in the S&P 500, NDX 100 and Dow if you play the
DIAs, your market timing will immediately improve, especially if you get some
convergence with other alert levels and the actual dynamics at the time. FYI,
the 1415.84 80% band was right at the 1417.80 50% retracement level between 1530
and the recent 1306 low. You got entry yesterday below 1414.65 on a narrow-range
reversal bar as it traded down to a 1388 low.

On the short side,
(
BRCD |
Quote |
Chart |
News |
PowerRating) went south first, followed by
(
BRCM |
Quote |
Chart |
News |
PowerRating) which gave you clearly
defined short entries. I have included both the daily and five-minute charts for
your records. BRCM’s first entry was on a Slim Jim breakout below 252 and a
second entry from a basic 1-2-3 pattern, both of which were taught at the
seminar.Â

There was also a
continuation entry to new intraday lows below 246. BRCM traded to an intraday
low of 234.5, closing at 239. The reason why it was on the short-alert list
yesterday was because, as you will see on the daily chart, it had advanced 29%
in seven days to Monday’s high of 253 which is right at the down
trendline.Â

It had advanced 15% the
past three days on wide-range bars with a corresponding three days of declining
volume. Yesterday, it opened at 255, traded to 256 3/16, then reversed Monday’s
high of 253 to the downside. It went south from a Slim Jim below 252 and again
from the 1-2-3 pattern below 251 5/16, hitting 246 before sideways action and
then another breakdown below 246 to an intraday low of 234.5. Nice day.

These kinds of shorts
happen often with the chosen ones and I call them airpocket shorts. When the accelerators (the momentum funds and the hedge funds) can’t game the stock any
higher because the real buyers walk away, the result most often is airpocket
shorts.

Alert levels to be aware
of and save for reference:

S&P 500: .50 1418; 50-day EMA 1428;
200-day EMA 1432; .618 1444; .786 1482.Â

There is strong convergence in the 1428-1444 zone with only 16 points’
separation.

NDX 100: 50-day EMA 3524; 200-day EMA 3548; .50 RT 3565; .618 3702; .786
3898.

The NDX has traded to a 3515 high so far off the 2982 low.

face=”arial, helvetica”>(December Futures)
Fair Value	size=2>Buy	size=2>Sell
11.90	13.10	10.70

Pattern
Setups

The Generals are speaking with their
money in the cyclicals and the perception might be that there will be a soft
landing and these stocks are oversold and underloved.Â

These stocks could very well turn out
to be buys if they hit the volatility bands on the downside and if they come back up
and reverse the lows, so they’re a two-edged sword today. If you get
trade-through entry, they’ll be a short and be ready to go the other way.

Some of the chosen ones have come a
long wayÂ in this rally, e.g.,
(
CIEN |
Quote |
Chart |
News |
PowerRating) +49% in nine days to new highs.
These have advanced pretty quickly and they’re certainly going to retrace.

Have a good trading day.

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Contra Rally Alert

BUY THE FEAR, SELL THE GREED

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