A Case Study In Absurdity

• October 29, 2001
• Dave Floyd

Last week taught more lessons than one could possibly want. This
market was thrown every possible bit of bad news, earnings, economic numbers, more
anthrax cases, etc., and yet, the indices not only held on, they flourished.
Will it last? If you are asking my opinion, no. Last week,
technicals aside, was a case study in absurdity. But all good traders know
that opinions are not what allow you to win the game, it is simply acting in
accordance with what is happening at that moment.

If you stuck to that premise, the market rewarded you quite nicely, as the
intraday ranges in the latter half of the week were very conducive to intraday
trades. The one-minute chart of the last hour of trading on Friday
afternoon allowed traders ample entry points on both the long and short
side. It goes without saying, “trade ’em as you see ’em”. Which
leads me to my point.

Like most traders, I too have other positions in the market, separate and
distinct from my “bread and butter” daytrading account. Perhaps, like me,
you approach those positions based both on technical as well as fundamental
information. Generally speaking, many people are positioned on the short
side, given the charts and current economic downturn. Thursday as well as
Friday tested one’s resolve. It was puzzling, given the economic reports
which had been released on Thursday morning, and once the market turned back up,
it continued to wear down the most die hard shorts for the remainder of the
session. Friday offered more of the same.

I will be the first to admit that this gut wrenching price action affected my
perception of my intraday trading. Suddenly, I was more concerned about
what my short positions were doing as opposed to taking full advantage of the
wonderful price action unfolding before me. It was not long before I took
a breath and let my stop-loss orders on my shorts take care of business rather
than my emotions (none have been hit as of yet). I never looked back and
went on to have a great day…buying pullbacks all afternoon.

Does this sound familiar? If not, great, you have mastered the ability
to differentiate between noise and the big picture. I am sure you did
incredibly last week. If it does sound familiar, you need to remember
that from a longer-term time frame, last week’s price action was noise, nothing
more. If you do have short positions on, did the price action last week
change the macro view of the economy one bit? No. Did it suddenly
offer a bright horizon for earnings? No. Did it spell the end to the
uncertainty facing us in Afghanistan? Unfortunately, no. Is the
position still valid based on your interpretation from a technical analysis
standpoint? I am sure you get the point.

If you are trading on multiple time frames, make sure you keep them
differentiated while you are intraday trading. Your results will reflect
it.

Moving on to the technicals of the current
market, you will notice that
the daily charts of the S&P and Nasdaq futures are near critical moving
averages, in particular, the 20-day average. The S&Ps failed to close above theirs
on Friday, while the Nasdaq posted its second consecutive close above it.
These two averages will surely play a pivot role in intraday trading until the
indices make a clean break away from them. Make a note on your charts.

Looking at some potential setups from a position standpoint, I offer you the
following:

Boston Scientific
(
BSX |
Quote |
Chart |
News |
PowerRating) is poised for a breakout of the well-tested
23.40 level. Other technicals on this stock look good too.

People’s Bank
(
PBCT |
Quote |
Chart |
News |
PowerRating) showed up initially on my scan for daily
charts. While I thought it looked vulnerable on the daily chart, I was even more keen on
a short after I looked at the weekly chart. A break of the $22 level would
certainly be bearish.

Key Technical Numbers:

Thought For The Week:

“Aspiring traders
must perfect their methodology to the point where it becomes robotic.style=”mso-spacerun: yes”> Once you reach that point, where
reflexive actions take the place of thought, you then become a great trader.” Lewis Borsellino.

As always, feel
free to send me your comments and questions.

Dave