The Action’s in the Four-Letter Stocks
Based on the S&Ps, which are now up over 9 points, it looks as if they are planning to gun them higher this morning after the three-day pullback to the 20-day exponential moving average on the S&P 500 cash, which is 1407.78. The S&P 500 closed at 1403.90 yesterday. It’s a good spot for the large program traders to force a trade, knowing full well in the absence of negative news that the S&P 500 will accelerate above the 20-day EMA. And after a three-day pullback, the timing is right. They will force the higher opening on the New York Stock Exchange, squeeze the institutions that seem to think they have to participate on the opening, and then sell short into the higher stock prices to complete their setup against the futures. After the apparent gap up this morning, look for the pullback to close the gaps and test the lows. Look for entry on your five-minute charts. Some of you more aggressive and more experienced traders with direct access communications might fade some of the exaggerated openings. The specialists don’t lose many of these games as they gap it and pull it back to cover their shorts. It’s a scalp trade. In some of the higher-priced stocks, you often get a good move as any buyers that were in on the exaggerated opening walk away to see how the stock trades. But if they are really serious buyers they won’t let it fall too far as they will be embarrassed by their exuberant participation on the open and get reloaded with more stock, so their VWAP (volume-weighted average price) looks good. That’s the game. ‘…the best trade might be the March T-bond…’ Now that some of the Fed regional presidents are jawboning about how perfect the economy is, and growth will slow or at least not accelerate next year, the best trade might be the March T-bond, trading above its 50-day EMA of 113.08 and above Tuesday’s high of 113.04. Based on the 5.05-point move from the October low of 110.12 to a swing-point high of 115.17, and then a retracement to a higher low of 111.05 on Dec. 1, it tells me the long bond could trade up to at least the 116.10 level on a measured move. And that happens to also be the 200-day EMA. This will of course be bullish for tech stocks and many of the smaller- and mid-cap issues that have big burn rates on cash to push their widgets before the guy in the garage next door builds a better mousetrap. Remember, going forward, when you buy tech stocks and take them home overnight and buy puts, it takes away the surprises that are certainly occurring more frequently. Most recent example isVISX[VISX>VISX]. Do you really care if your position stock goes up 30% and you only get 22% to 25% of that move? Hardly. But I bet you do care if your stock goes down 30% on overnight news and you get caught on it. Yet if you have puts for protection you’d only lose maybe 5% to 8% of that because you were protected by the puts. I like that risk-reward ratio. Program Trading NumbersBuySellFair Value3.101.052.00 Pattern Setups Lucent [LU>LU],Comverse Technology[CMTN>CMTN], AOL [AOL>AOL],Standard Microelectronics[STM>STM], Procter &Gamble[PG>PG], Applied Materials [AMAT>AMAT], GeneralMotorsClass H [GMH>GMH] (going above Tuesday’s high of 955/8),Tellabs [TLAB>TLAB], and RedbackNetworks[RBAK>RBAK] (going over Tuesday’s high of 154 15/16). On all of these trades and any pattern setups that we mention, before you take the trade you are always looking at the stock and market dynamics to confirm your entries. We’ll move into the numbers for the March S&P 500 contract tomorrow. Have a good trading day.