Expect Churning
Expect Churning Looks like panic Thursday, at least early on. We gapped early yesterday as the S&P 500 cash was up 16 points by 9:45 AM ET, taking care of all those retail buy orders coming in, and then traded in the 1278.50 – 1270 range until 1:30 PM, at which point it broke out to the upside and ran to 1289.45, with a closing blitz at 3:45 PM.
As I mentioned in prior commentaries, expect some churning as the S&P 500 cash trades back up to the 200-day exponential moving average (EMA) of 1290 and to the 50-day EMA of 1310. The down trendline from the 1420 high is now around 1330. These are just reference points you should be aware to help you make better trading decisions. You can initiate shorts on pullbacks to the downtrending 200-day EMA; when these reference points coincide with weak market dynamics, it makes a stronger case for entry. Of course, the same is true on the long side for a break above the 1330 down trendline, and then above the last swing point high of 1339.25
| The earnings game began after the close, as retail sold AOL and CMGI down on the IBM “crisis” |
and take advantage of news. IMNX had its rating cut by a brokerage firm and opened down 5% at 47 1/4 on 20,500 shares. (Keep in mind that is double-counted volume–it would only be half that on the NYSE. Now you know why market makers pay for that ever-precious uninformed retail order flow.) The stock then traded back to 52 1/8 by 11:45 AM–what a surprise–after giving good trade entry at 50 1/8. The bottom line on that fiasco: market makers made money, you made money (if you took the continuation entry above the previous day’s close at 50 1/8), and, of course, retail lost money. The entry price was a breakout above the 200-day EMA as well as the past eighteen closes. See your daily chart.
AOL, YHOO and CMGI had excellent momentum moves as the generals, true to form, came back for them after eight-bar daily pullbacks. CMGI made a multi-point move after breaking above a three-bar head-and-shoulders pattern on the daily chart (see Figure 1). This is an excellent pattern that came in conjunction with the eight-bar pullback, and that with support at the 50-day EMA (the breakout also took the stock above the 10-day EMA), was a very high-probability trade entry. AOL, YHOO and the other Internets were strong at the time, and the overall market dynamics were obviously strong. CMGI closed during real market hours at 102 1/2.
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| Figure 1. CMGI (CMGI), daily. A three-day head-and-shoulders bottom presented a long entry opportunity. Source: Quote.com.
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The earnings game began after the close, as retail sold AOL and CMGI down on the IBM crisis (yes, another one). IBM is the most widely followed company, and analysts are surprised once again. You have to love the investment banking business; loyalty prevails, accurate research certainly doesn’t. IBM was up 5% yesterday on 37% more than its 50-day average volume. Nobody had a clue. If the institutions react today as they did the other day with LXK, and must participate to get something done on the opening, giving up lots of price and getting only a small share of volume on the opening, IBM will provide some good reflex trading opportunities.
Target Stocks Of The Day I don’t expect any long-side continuation entries early today, unless they set up on the five-minute charts, and after the opening downside blitz is over. These days are easier to trade than those that gap up and don’t pull back.
Stocks to look at today that are set up on continuation entries, but also on pullbacks: Wal Mart [WMT>WMT], Best Buy [BBY>BBY], Lycos [LCOS>LCOS], Network Solutions [NSOL>NSOL], Verity [VRTY>VRTY], Land’s End [LE>LE], JDS Uniphase [JDSU>JDSU] and Applied Materials [AMAT>AMAT].
| Program Trading Numbers | ||
| Buy | Sell | Fair Value |
| 10.35 | 6.80 | 8.65 |
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.