Know Thy Reference Points

  • October 25, 1999
  • Kevin Haggerty

Know Thy Reference Points Friday was an uptrending day all day after the gap opening–until around 3:45 PM ET, when the S&P futures dropped 12-13 points like a knife.

Only institutions putting money to work can change the trend of the market
The S&P cash was bumping up against its 50-day exponential moving average (EMA), which also happens to be around the same level as the 200-day simple moving average (SMA), which is 1311. You must know your reference points. The EMA and SMA are different in volatile stocks. I prefer the EMA, but look at both, because most market timers use SMAs for mutual fund switching. Reactions at either one can provide trade opportunities.

On Friday, programs hit right at the reference point, and you also had the rumors about Cisco (CSCO) not making their number. It doesn’t matter what the reason was, but if you knew your reference points, you got an excellent entry point after a double top in the S&P 500 futures (see Figure 1), which you could have jumped on using the spiders (SPY) or e-mini S&P futures.



Figure 1. December ’99 S&P futures (SPZ9), 1-minute bar, 10/22/99. Source: Quote.com.

Are we going to run to the 1330 downtrend line in the S&P 500 index, or even 1340 (which is the last swing point high)? Who knows, or cares? But it’s a reference point, and you must be ready to react when you see the dynamics at those points. We are in a downtrend, and the S&P 500 cash has to trade and close above 1339.25 to change the trend of lower highs and lower lows. All the chatter and predictions on TV won’t do that; only the institutions putting money to work will.

The most recent low of 1233.65 may or may not stand. But I do know that you should be aware of two reference points on your five-minute charts for possible short-side entry: There’s nothing but air below 1298 and then below 1295 in the S&P 500, until you hit the 1277 level. (Take a look at a two-day five-minute chart.) A Cisco-type negative announcement could get you to that number very quickly.

If you look at the S&P 500 downtrend on a three-year weekly chart, you can see where the index can easily trade to the 1190-1210 level, which is where we broke to new highs early this year. Such a drop would be a 50% retracement of the entire October ’98 to July ’99 move, and would be a 15.7% correction from the 1420 high. Trade entries have higher probability at inflection points, but you must be aware of them to take advantage. Do your own work and we will try to help. It’s amazing how good you will get if you put in the time.

There is tremendous volatility in a nervous market. Last week we made up around 75% of the previous week’s loss. Techs were up and down, overreacting to news, financials were being thrown away, and last week they couldn’t buy them fast enough. An example is Chase Manhattan Bank (CMB). On October 15, the institutions couldn’t sell enough of it, down to 65 13/16, just to buy it back up to 81 3/8 just five days later. It’s as if they’re reacting to the earnings news just like retail investors.

With barriers lifted on insurance companies, banks, and brokers, there will be trading opportunities with all the rumors, and the Generals will surely jump in even more than they already have, in fear of missing a takeover homerun. For example, PaineWebber, DLJ, Merrill Lynch, Goldman Sachs, all crossed their 50-day EMAs on double their normal volume on Friday (which you probably saw on the TradeHardNews.com screen).

Target Stocks Of The Day Stocks set up for continuation entries are Circuit City [CC>CC], Best Buy [BBY>BBY], Tandy [TAN>TAN], Tiffany [TIF>TIF], Alcoa [AA>AA], Vodafone [VOD>VOD], Solectron [SLR>SLR], Nextel [NXTL>NXTL], and Gilead Sciences [GILD>GILD]. If you haven’t already, read Dr. Paul Ruggieri’s “Medical Technology Insight” articles. They’re excellent; I find stocks in there all the time.



Program Trading Numbers
BuySellFair Value
9.706.308.00
On the short side, if we go south, stay with the SPDRs [SPY>SPY] or the QQQs [QQQ>QQQ] below 123 1/2.

Editor’s note: Join Kevin and Larry Connors for our second live audio TradehardNews.com Forum– “Integrating the TradingMarkets.com Indicators With TradehardNews.com To Maximize Your Trading Performance.” Kevin and Larry will explain how they combine information from TradingMarkets.com and TradehardNews.com to take profits out of the market. It’s in the TradingMarkets.com Live Forum section this Thursday, October 28!

If you want to learn more about Kevin Haggerty’s trading strategies, click on the link below to go to his series of tutorial articles.