A Change In Perception

They
got everybody yesterday as the perception changes
to maybe and
not-so-soft and some of the brokerage firms are now reducing their S&P 500
operating earnings numbers for 2001 from the 8% to 10% range down to the 5% to
6% level. It would take a significant drop in interest rates or a further decline in stocks to offset that
reduction in operating earnings in order to balance the valuation equation.

Imagine that. And I heard Bill Clinton on
national TV as he sat with Bush on Tuesday and told the nation that there isn’t
one sign of a recession. Enough said. 


The NDX 100 gapped down to
2251, or -4.6%, by the 9:35 a.m. bar yesterday, as the professionals took on the
retail inventory at substantial discounts before taking the NDX 100 back up 3.8%
to a 2337 intraday high by the 10:20 a.m. bar. Nice contra rally. It was
straight south from that high down to the intraday low of 2200 by the 3:10 bar.
It rallied 2.8% from that low and looked like the Turk had arrived, but not to
be, as it sold back down, closing at 2210.


There were some converging
levels from the weekly time frame that put you on alert for intraday setups at
these levels. Two Fib levels that are in play are the 2228 level, which is where
the leg down from 4147 would equal the down leg from 4816 to 2897. The next
level doesn’t come into play often, but you will see it in the indexes on
occasion, and this is the .707 level at 2189. Another stronger magnet is the
1.618 extension of the leg from 2897 to 4147. This level is 2125. That was a
very tight convergence, with 2228, 2189 and 2125.


Yesterday’s volatility
bands for the NDX were the 1.5 band at 2269 and the 2 band at 2225 converging
with the 2228 equal-leg-down level. The next key alert zone below is the number
that I didn’t want to mention last week, as the NDX approached the 2496 .618
level, which it did, then gave us a 23% rally. The .786 level is 1866, which is
61% down from the 4816 high. On yesterday’s close of 2210 on the NDX, we are now
down 56% year-to-date.


Yesterday was the biggest
one-day blow-off and worst volume ratio for the Nasdaq Composite since this last
leg down started Sep. 1. The volume ratio was just 10. They caught up with the
S&P 500 also, as there was 1.4 billion shares, with a volume ratio of 22 and
-923 decliners over advancers. Blocks picked up to 31,337. It clearly shows
we’re in the high end of the fear zone. Time to play the game.














face=”arial, helvetica”>(March Futures)


Fair
Value


size=2>Buy


size=2>Sell


18.80


 20.40 

 17.75 


Pattern
Setups


Stocks today: From a
daytrading standpoint, you must work the intraday setups, and I would start with
the biggest percentage down from yesterday on the Chosen Ones. I would focus on:
(
CIEN |
Quote |
Chart |
News |
PowerRating)
,
(
JNPR |
Quote |
Chart |
News |
PowerRating)
,
(
VRSN |
Quote |
Chart |
News |
PowerRating)
,
(
ITWO |
Quote |
Chart |
News |
PowerRating)

and
(
QLGC |
Quote |
Chart |
News |
PowerRating)
. These stocks look absolutely awful on the daily charts, but
could get a good contra bounce after this eight-day reversal. For example, QLGC
went from 72 1/8 to 129 3/8 in eight days, and in the next eight days has
declined from 129 3/8 to a low of 65 1/2 yesterday. This is a ridiculous game
for position players, unless you are utilizing options strategies, but it is a
great game for defined daytraders that are flat at the end of each day, as you
are supposed to be. It is also excellent volatility for trading around core
positions by institutions and hedge funds, as many are obviously doing.


I will give you what I
think are the lowest denominator possible entry points in these stocks today, by
utilizing the following strategy. You use a two-line simple moving average of
the highs and the lows. Then you overlay a five-period EMA over that. For an
indicator, use an 8,3,3 stochastic for confirmation and/or divergence. I will
cover these kinds of strategies and much more at the Naples seminar in Florida.


Starting levels based on
last night’s close are: CIEN >65 7/8, JNPR >101, VRSN >71 3/16, QLGC
>70 and ITWO >38 7/8. These are dynamically changing moving averages, so
they will change as you look on your intraday charts, and these are on a
five-minute chart. Your entries are over the eight-period high moving average,
and place stops below the eight-period moving average of the low. You can reduce
position size to accommodate wider stops necessary in this volatility.
In
the semis, using the same strategy, you can get the
(
SMH |
Quote |
Chart |
News |
PowerRating)
‘s >48 3/8 and
the
(
BBH |
Quote |
Chart |
News |
PowerRating)
‘s >160 15/16.


You can continue with this
and go through all the stocks that set up.
(
SUNW |
Quote |
Chart |
News |
PowerRating)
acted great yesterday, so
any one of these you can pull up if you’re able to do it with your software and
get a little idea where the lowest common denominator entry might be, assuming
the dynamics look like they’re in your favor. And these numbers change all day
long as the moving averages change.


Have a good trading day.

Do you have a follow-up question about something in this column or other questions about trading stocks, futures, options or funds? Let our expert contributors provide answers in the TradingMarkets Question & Answer section! E-mail your question to questions@tradingmarkets.com.
For the latest answers to subscriber questions, check out the Q&A section, linked at the bottom-right section of the TradingMarkets.com home page.