Going With The Strength
Short term, the market has acted
schizophrenically over the prospect of whether we’ll get an expedited rate cut
between FOMC meetings. But long term, is there any doubt where interest rates
area headed?
News of more layoffs and a February
contraction in the National Association of Purchasing Management index raised
expectations of expeditious rate-cutting at the Federal Reserve. In past
commentaries, I’ve pointed to strength and pattern formation in choice
rate-sensitive retailers, financials and home builders. Today I see more of the
same Charter One Financial
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PowerRating), Freddie Mac
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PowerRating) and Fannie Mae
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PowerRating).
Group action has been known to
intermediate-term traders at least since the days of Jesse Livermore,
in my view the greatest and most influential stock trader who ever lived.
Livermore even applied something akin to his group theories to his commodities
trading.
Strong action plays such a key role in
stock selection and timing that I will sometimes take limited long positions in
leading stocks in very strong industries even in down markets.Â
The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. In the second field, a
blue relative strength line represents the displayed security’s price
performance relative to the S&P 500. The third field displays vertical daily
volume bars in black with a 50-day moving average in blue for volume.
All stocks, of course, are risky. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
check out the Money
Management area of TradingMarkets’ Stocks Education section.