Continuation Setup

The S&P 500 and NDX 100 were strong all day yesterday, as the S&P retraced 56% of the Monday debacle in momentum stocks. The Dow moved with the bond market: the bonds advanced, the Dow tanked, and vice-versa.

The basics retreated quickly after the emotional action of the prior four days, as many of the hedge funds that got in front of the institutional re-allocation into basic industry stocks rang the bell with 20-30% profits in some stocks, which backed off 5-10% in one day.

Monday’s big down in the S&P and yesterday’s rally have set up some good patterns if we get any follow-through today. People say to me that it’s just a relief rally and that it won’t last. I say, why think so much? No entry, no trade, no loss–period. If the buyers want to continue, our job is recognize that and get on board.

The S&P traded down to and held at its 50-day exponential moving average (EMA) the past two days and closed in the top of its range, setting up a good continuation move above yesterday’s high 1306.25.

Target Stocks Of The Day  Today’s stocks have similar patterns; they’re set up for continuation entries in the direction of the trend. Most of them have pulled back and closed above their 50-day EMAs. If the institutions think these stocks are oversold, they will replace stock they sold higher and buy at these levels to complete a nice roll in their positions. Believe me, institutions trade, just like you and me.

Keep an eye on: America Online [AOL>AOL], Ascend Communications [ASND>ASND], General Electric [GE>GE], IBM [IBM>IBM], LSI Logic [LSI>LSI], Northern Telecom [NT>NT], Tandy [TAN>TAN] Schwab [SCH>SCH], Qwest Communications [QWST>QWST], Merrill Lynch [MER>MER], and McDonald’s [MCD>MCD].

Program trading numbers  Buy: 10.78. Sell: 5.68. Fair value: 8.21. I hope these numbers help you. I think you saw the last two days that these programs really swung back and forth, and some of the smaller programs kicked in at slightly different levels. If you track this activity you’ll develop a better feel for market dynamics.

Editor’s note: If you want to learn more about Kevin Haggerty’s trading strategies, click on the link below to go to his new series of tutorial articles.