Put Time On Your Side
The news movers Wednesday gave the
medium-term trader little to add to his or her watch list, but that’s hardly
surprising given the Nasdaq’s 50% markdown from peak to trough. Even with
positive news, the high growth stocks will need time to round out sound
bases.Â
Most of what I see out there is wide
and loose and risky, or rallying off lows and thus beneath a ton of overhead
supply. There are a few valid bases, but their relative scarcity means this
market has a way to go before I can put much credence in the idea that Nov. 30
formed a bottom.
QLogic
(
QLGC |
Quote |
Chart |
News |
PowerRating) traded like a stock
in a correctional market. The leading storage area network infrastructure provider
announced that it has been elected to the S&P 500 index. The stock opened up
and headed higher but blew nearly all the day’s gains. The rally turned into a
selling opportunity.Â
The top field of all stock charts in
this commentary uses a logarithmic price scale and displays a 50-day price
average in red. In cases where the displayed security has traded long enough,
the top field also will exhibit a 200-day moving price average in black. 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.
Another example of what I’m seeing in
this market is Tibco Software
(
TIBX |
Quote |
Chart |
News |
PowerRating). In the past, a strong grower and
price performance leader, now rallying, up 6 5/16 to 62 3/16 today, but beneath
heavy overhead supply. Until this stock can overcome its 50- and 200-day moving
averages as well as its mid level, its off my radar.
As Kevin Marder points out in his
latest commentary,
Wednesday’s pullback on the Nasdaq Composite was within reason given the gains
in the prior session. I agree. Still, let this rally prove itself. I need a proliferation of high relative strength stocks forming sound bases in
order to trust a rally. That condition is absent here.
Furthermore, we never saw negative
sentiment reach capitulation levels when the market marked the Nov. 30 low. In
fact, sentiment as evidence by the ratio of Chicago Board Options Exchange put
volume to call volume grew more bullish as the market bottomed. For more on this
angle, see my lesson on psychological
indicators. The following chart shows the Nasdaq Composite vs. an
average of put volume vs. call volume on the CBOE (slightly different from the
raw put-call ratio used my lesson, but it still makes the same point).Â
All stocks are speculative. 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.