Can We Turn The Double Play?

• February 5, 2001
• Goran Yordanoff

Ok, it
appears we played the market perfectly post-FOMC. We recognized that
technology needed to wring
out some excesses from the pre-fed-hype run-up and that
defensive issues responded very positively after the Fed meeting. With
the Nasdaq Composite
shedding nearly 400 points (at the lows of the session) from
the January 24 intraday high and nearing key retracement levels, you had
to start thinking about
scaling in from the long side when it bounced around mid-day.

With the current setups I see in both
technology and some of the “defensive” sectors,
we may be in a position to turn a double-play here. That is, going
long some QQQs and strong
technology leaders while shorting some defensive names
that have had unbelievable run-ups recently.

Let’s look at some examples:

Daily chart of the Nasdaq composite
below:

As we can see from this chart, the
Nasdaq composite retraced nearly 50% of its
gains from the January 3 low to the January 24 high. The composite
closed the session
clinging to its 38% retracement line and showing us a nice
“tail” down. In addition, area “a” which represents the
up-gapping window
from January 17, held as support although it was violated intraday. As
I have stated before,
these windows are oftentimes violated during intraday activity.
It is the closing price of the stock or index that is significant in
determining whether or not a window area has held.

Let’s now go to a daily chart of the
QQQ:

The QQQs show us the same picture as
the Nasdaq Composite. The QQQs not only found
support at their 50% retracement line (not shown in chart — take my word
for it) but have formed a
potential bottoming formation for this move. At this
stage, it is crucially important for the QQQ to recover at least 50% of
its loss from last
Friday’s selloff. At this stage, the QQQs look poised to bounce
from these levels.

On the other end of the spectrum, the
defensive tobacco stocks like
(
RJR |
Quote |
Chart |
News |
PowerRating) and
(
MO |
Quote |
Chart |
News |
PowerRating)
have been quietly exploding upward. In fact, the stinkers have been rallying
ever since the Nasdaq began its full nose-dive from the 5000+ area.
Take a look at these
charts and apply your favorite technical tools to them to
determine if their internals are confirming their price action. Mine are
telling me that the end of
this run is close at hand.

In addition, the retailers, brokers
and apparel stocks I mentioned last week have given us great profits on the
short side. It appears they have more to go
on the downside.

LONG WATCH: Semiconductors:
(
CMVT |
Quote |
Chart |
News |
PowerRating),
(
TQNT |
Quote |
Chart |
News |
PowerRating),
(
AMCC |
Quote |
Chart |
News |
PowerRating).

                       
Fiber optics:
(
JDSU |
Quote |
Chart |
News |
PowerRating)/
(
SDLI |
Quote |
Chart |
News |
PowerRating),
(
CIEN |
Quote |
Chart |
News |
PowerRating),
(
NEWP |
Quote |
Chart |
News |
PowerRating),
(
GLW |
Quote |
Chart |
News |
PowerRating).

                       
Networkers:
(
CSCO |
Quote |
Chart |
News |
PowerRating) —
earnings tomorrow is key.

                       
Watch
(
JNPR |
Quote |
Chart |
News |
PowerRating) for a
bounce here; it looks ready.

SHORT WATCH: Banks, brokers, tobacco,
retailers, apparel. Give me a break with
these, already.

Tomorrow I will post some charts of
the most absurd moves up by the weakest names
in the defensive sectors.

Get ready to get positioned tomorrow
if the market decides to rally.

Goran