8.5% Alert Level Rally

August 4, 2000
Kevin Haggerty

So far
this year, the Nasdaq 100
(
NDX |
Quote |
Chart |
News |
PowerRating) is down 2.3% and
the Nasdaq is -7.6%. If you pull up your commentary from July
31, you will see the alert levels framing the NDX 100 and I hope you keep
and reference these alerts, because they can be very powerful pivot points, as I
will point out today.Â

After the move from the
October 1998 low of 1063 to the 4816 all-time high, the NDX 100 retraced to the
.50 level at 2897. The exact .50 retracement number was 2939 but remember, we
are just looking at the zone for any change in direction or at a key inflection
point. That decline from 4816 was -40%, ending below a rising 200-day EMA. From
that point, the NDX rallied to the .618 level with the high at 4089 on July 17.
This was a 41% advance from the 2897 low. The exact .618 number was 4083.

As I mentioned in the
July 31 commentary, the .618 retracement between the 4089 minor top and the 2897
low was 3353. Yesterday, the NDX hit a low of 3342 after breaking below the
prior four days’ lows, which immediately accelerated the move. It then reversed
the exact .618 level of 3353 and proceeded to rally to our intraday high of
3626, closing at +3.8% on the day, at 3624 and above the 200-day EMA of 3519.

The first Friday
overreaction was, again, way overdone as the S&Ps had sold off 18-19 points
and the Instinet selling was also emotional, as Sun Micro
(
SUNW |
Quote |
Chart |
News |
PowerRating) was off 3 1/8 points,
and Oracle
(
ORCL |
Quote |
Chart |
News |
PowerRating) and Cisco
(
CSCO |
Quote |
Chart |
News |
PowerRating) both off 2 3/4 points in the Instinet bubble. The
momentum stocks like Juniper were down 5-10 points, pre-NYSE opening. This
sets the stage for fading-the-open strategies using volatility bands and trap
doors. Specialists and market makers make money in that kind of a tape, not
people who follow the inane news and economic reports. Which side are you on?

The NDX 100 rallied 8.5%
from the intraday low of 3342 and it was +8.1% after it reversed the exact 3353
.618 number. Your next entry opportunity was when it reversed a 3438 low of the
past four days. After that, it was crossing a 3519 200-day EMA and the last
entry was above 3548 as it broke out of an ascending triangle which put the
index above the 20-, 60- and 260-period EMAs on your five-minute chart in
addition to being above the 200-day EMA. You could have played the QQQs, Nasdaq
e-mini futures or stocks like Sun Micro and Cisco.

The decline from 4089 to
3342 was -18.3% and we don’t know that it has ended but we certainly know where
the downside pivot points are which include first the 200-day EMA and secondly a
new low below 3342. Your first sell action would come recrossing the 200-day EMA
to the downside with a tight stop right above it.Â

If this proves to be an
A-B-C correction from the 4816 top, the next bottom could very well be in the
2160-2170 zone. Let’s hope with
the election coming, the market is nice to us and we can break the .618 4089
level, which would carry the index to the 4300-4500 zone. That might be
difficult unless the election cancels out the September to October period which
we know can get scary, especially with the media standing by to harp on it 24
hours a day as they fan the fires so they can sell advertising.

There were some great
fades yesterday like Sun Micro which was down 3 1/8 points in the Instinet prior
to 9:30 a.m. That was right to the level that it had broken out from on July 20.
See your daily charts. It
was right at the first volatility band so it was an excellent fade. Review my
lesson on Volatility Bands on the site. Needless to say, Sun Micro was back to
100 by 9:45 a.m., at 102 by 10:15 a.m. and closed at 107 11/16.

On the NYSE, you had
great opportunities at Analog Devices
(
ADI |
Quote |
Chart |
News |
PowerRating) and Teradyne
(
TER |
Quote |
Chart |
News |
PowerRating), which both had pre-opening indications
down to volatility bands. Trade with professionals, not against them, but you
must be able to recognize a change in direction, change in dynamics and know key
inflection points and volatility bands if you attempt to trade this way. It
is harder to do unless you understand it, but the rewards are much greater.

(September Futures)

Fair
Value

Buy

Sell

9.50

10.70

8.30

Pattern Setups

Have a good trading day.

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8.5% Alert Level Rally

BUY THE FEAR, SELL THE GREED

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