Strong Reflex Rallies Seen After Three-Day Down
It was the
market’s version of power lunch on Friday as the S&P Futures
started out strong +17 by 9:45 A.M. ET, +25 by noon and then doubled to over +50
by 4:00 P.M. Big reinvestment money came in Friday as all sectors were green
except for XBD which turned green in the final hour. There was big-time volume
at 1.2 billion shares with excellent breadth as advances outpaced decliners by
1528. The volume ratio was huge with 823 million up and 366 down. Institutional
10,000-share blocks were also big at almost 26,000.
The techs and Internets rebounded and
the NDX (Nasdaq 100) finished +188 points to join the blue-chip big-cap stocks.
There was a drug war as the Generals tripped over one another to buy them, led
by Merck [MRK>MRK] and Bristol-Myers Squibb [BMY>BMY]. FYI, [BMY>BMY]
was up 9 1/8. This is the same stock downgraded by DLJ on Jan. 4, and traded to
a low of 58 15/16 closing at 59 9/16. The Generals must have had second thoughts
after blowing it out on Tuesday. A 38% retracement level and a 1387 support
level has proven to be an inflection point as the S&P 500 index level never
closed below the 1385 level but did drop briefly to 1377
intraday.
| “Sharp downs usually mean strong reflex rallies which is what we are seeing now.” |
Sharp downs usually mean strong reflex
rallies which is what we are seeing now. The down lasted only three days but it
was 100 S&P 500 cash index points. Refer to my commentary on Jan. 5 which
included the reference points but also talked about the reflex-rally guidelines.
Seeing that we are not in the forecasting business, unless it involves
high-probability action by the Generals, we just want to observe market behavior
and take a position when it appears you have a low-risk trade with high
probability.
We have no clue whether the decline was
a three-day whip and then up, or Leg A of an ABC decline which, if it started
from Friday’s high, would have a high probability of taking the S&P 500 down
to the 1340 or 1327 levels for Leg C. Leg B is the current rally. face=”arial, helvetica” size=2>If the Generals continue to take it up and look
for a new high, you should look for short entry or put protection if it trades
back down below the current all-time high of 1478 with a very close stop above
1478 for a low-risk entry.
We have already retraced 62% of the
decline, so from here to the highs we must be alert for a reversal pattern on
the daily charts to signal a short entry. If it is just allocation of new money
and readjusting portfolio weightings, and the market dynamics change
quickly and fear jumps up again, it
could just be a reversal day and recrossing of the 20-Day EMA which is 1432 to
the down side as a possible entry point.
Remember, you are always looking for
those convergences where you are planning your entry. The most likely will be
the VIX which closed Friday at 23.20 so your focus will be on that as it moves
lower to give you a possible reversal signal. For those of you who are
unfamiliar with VIX, check the market-bias indicators on the TradeHard.com site
every day.
| href=”01032000-3257.cfm”> face=”arial, helvetica” size=2>Program Trading Numbers | ||
| size=2>Fair Value | size=2>Buy | size=2>Sell |
| size=2> 14.15 | size=2>15.35 | size=2>12.95 |
Pattern
Setups We started this morning with a big flurry with AOL
[AOL>AOL] and Time Warner [TWX>TWX]. The S&Ps ran to +20 in
early-morning exuberance. Nasdaq futures [NDX0>NDX0] are big. It looks like
this will be a chance for the momentum guys to run Internet stocks again
today.
Yahoo! [YHOO>YHOO], [CMGI>CMGI],
[EMC>EMC], Qualcomm [QCOM>QCOM], Sun Micro [SUNW>SUNW], Novell
[NOVL>NOVL], Oracle [ORCL>ORCL] and Cisco [CSCO>CSCO]. I see some of
these are already getting run up right away. Pre-opening they’ll probably run
the retail in for the early-morning buy orders that will come in on stocks like
[CMGI>CMGI] which is +23 points right now. If you’re going to enter it’s
going to be on a second entry or after a pullback and then a move out of an
intraday pattern on your five-minute charts.
Have a good trading day.