Becoming Overbought

November 6, 2001
Dave Landry

On Tuesday, the Nasdaq started lower, rallied and drifted
back down. Then, on the Fed announcement that they had lowered rates (for the
tenth time in a row!), it rallied nicely into the close.

The S&P put in a similar performance. It’s now nicely
above its recent trading range.

So what do we do? Momentum
still favors the upside but we are becoming overbought. I’m basing this
overbought condition on relatively low 3-day average NYSE TRIN readings, an
overbought McClellan Oscillator and price itself. And, the VIX should chime in
soon too. However, as you know, overbought can certainly become more overbought.
Therefore, I think the best thing to do is to manage existing longs (take
partial profits and trial stops), be selective in new longs (take only the
strongest stocks and best setups) and begin looking for a short or two. Above
all, wait for entries on any new positions.

Looking to potential setups, on the short side, Illuminet
(
ILUM |
Quote |
Chart |
News |
PowerRating) is set up as Bow Tie/Inverted Cup and Handle.

Trail ’em If You Got ’em

As you know, one of my favorite trailing stop techniques is
simply putting a protective stop (for longs) below the lowest low of the last
two days. Just for fun, let’s track Immunex
(
IMNX |
Quote |
Chart |
News |
PowerRating) (mentioned
Friday, see archive), to see how far this will take us.

Smoke ’em After Hours–Follow Up

Last night I talked about exiting partial profits after
hours when you have a windfall profit. If you didn’t read Monday’s
commentary, you might want to read it before proceeding. Essentially, I said
that I generally don’t enter new positions in after hours trading but will take
the opportunity to exit partial profits on good news. Notice Cephalon
(
CEPH |
Quote |
Chart |
News |
PowerRating),
which traded as high as 70 (a) in after hours trading, opened much lower than
that (b) on Tuesday and only finished up a buck. As you can see, it often pays
to lock in a piece of a windfall profit while the news is still fresh.