No Commitment
Friday was the day
of the macro-news movers. Financial stocks, in particular
the brokers, rallied on news that economic growth had slowed
to 2.7% in the third quarter, raising hopes that the Fed
will ease rates.
At the risk of
being redundant, let me repeat my mantra: Intermediate-term
traders must wait until high 12-month relative strength
stocks form near-complete bases in large numbers. If you try
to play the winning sectors, at least insist on volume
coming into your target stocks.
Volume was missing
in many of the financial stocks despite their price gains
Friday just as volume was missing in Thursday’s bounce in
semiconductors. Let’s survey a few of rate-sensitive stocks.
Note the mediocre-to-sub-par volume American Express
(
AXP |
Quote |
Chart |
News |
PowerRating),
JP Morgan
(
JPM |
Quote |
Chart |
News |
PowerRating), Greater Bay Bancorp
(
GBBK |
Quote |
Chart |
News |
PowerRating) and
Lehman Brothers
(
LEH |
Quote |
Chart |
News |
PowerRating). One exception was Federated
Investors
(
FII |
Quote |
Chart |
News |
PowerRating). But by and large, the institutions have
not given us real commitment.
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What am I waiting
for? As an intermediate-term trader, for momentum buys, I
want stocks with 90 relative strength for the past year or
higher. I also insist that my target stocks have cleared
their 50- and 200-day moving averages.
However, the stock
still must pass a final test. It must clear its mid level,
the half way point from its last 52-week intraday high and
the subsequent intraday low of the correction. To get the
mid point, add the two prices together and divide by 2.
The reason for the
mid level requirement is the same as the moving average
requirement. All are tests that demonstrate a stock’s
ability to overcome overhead supply. Overhead supply is the
amount of stock in the hands of shareholders with paper
losses. These so-called weak holders tend to sell into
rallies, blunting further follow-through to the upside.
All stocks, of
course, are risky. In any new trade, reduce your risk by
limiting your position size and setting a protective price
stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to
combining price stops with position sizing, see my lesson,
Business. For further treatment of these and related
topics, you’ll find extensive lessons in the
area of TradingMarkets’ Stocks Education section.
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