Overreaction Mode

  • October 28, 1999
  • Kevin Haggerty

Overreaction Mode A three o’clock blast-off yesterday afternoon, led by the two highest-priced stocks in the Dow, American Express (AXP) and J.P. Morgan (JPM), put the Dow up over plus-100 points in the blink of an eye. (You can imagine if the techs were in gear, and Microsoft and Intel were in the Dow and running.) The same thing happened just before the last CPI report. What a coincidence.

There will be all kinds of proprietary and hedge fund gaming going on with the new Dow because it’s a price-weighted average, the fewer stocks, and the new additions, which are certainly more representative. AXP and JPM accounted for 70 points of the Dow, which finished up 93, despite Hewlett Packard (HWP), which was -32 Dow points. IBM was also down, with the other major techs, and also the two soon-to-be Dow components, MSFT and INTC.

Short-term price movement is made up of investor psychology and perception, not reality
The brokers exploded, with the major firms like Morgan Stanley, Merrill Lynch and DLJ all up 6-10%. Chase Manhattan Bank and AIG also made great moves, up 6% and 4%, respectively. The Generals are in there again with the financials, and there will be many trade setups in this group as we move into the momentum phase, as everyone expects large deals to start falling out of the sky. Short-term price movement is made up of investor psychology and perception, not reality. When the momentum phase starts (as you have seen in the Internets), it creates trading opportunity.

We have two numbers this morning–GDP and Greenspan’s Employment Cost Index (ECI) at 8:30 AM ET–and you should be planning how to trade the overreaction. The first counter-trade to the reaction will probably provide opportunity.

The S&P 500 has gone up, down, down and up the past four days, and is now locked in a four-bar consolidation between the 200- and 50-day exponential moving averages (EMAs). That should be broken today. The S&P is also sitting just below the swing point high of 1308.90, and the 50-day EMA of 1307.42. If the index breaks above these reference points, it should run to the major down trendline at the 1325-1330 level.

Regarding yesterday, it must just be great research that enables the S&P futures buyer to make that perfect trading decision late in the day before major numbers are released. Remember the last CPI? It’s the same deal. I’ll see what I can do to get us on the list. (Fat chance.)

Watch if they gap up and get ahead of themselves. Yesterday’s close in the spiders (SPY) was the highest in 11 days–on the lowest-volume day in the same stretch. That doesn’t jibe with the late futures move.

Pattern Setups Of The Day Try to stay with the blue chips. (Yesterday we didn’t get much at all; techs had a bad day–only AAPL and VRSN gave good entry.) Watch Cisco [CSCO>CSCO], EMC [EMC>EMC], Nortel [NT>NT], Sun Microsystems [SUNW>SUNW], Wal Mart [WMT>WMT], Apple Computer [AAPL>AAPL], Nextel [NXTL>NXTL] and Exodus Communications [EXDS>EXDS]



Program Trading Numbers
BuySellFair Value
8.606.207.40
Also, two Internet to watch, despite Amazon.com getting whacked here early on, are America Online [AOL>AOL] and CMGI [CMGI>CMGI]. I don’t know why everyone is so surprised about Amazon. All these companies are the same: high marketing costs, increase your revenues–that’s the game. The market makers are taking full advantage of the retail selling in Amazon and Yahoo. It’s not the institutions selling those stocks down pre-opening.

Finally, for you bottom fishers, watch McDonald’s [MCD>MCD]. This is not a day trade–it might be a good option strategy candidate. Yesterday it traded 5.1 million shares. It wasn’t up on the day, but it finished in the top of its range. The 5.1 million shares (vs. 2.9 million 50-day average) suggests someone is bottom fishing.

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 tonight at 7:30 PM ET!

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.