Correction Under Way

March 20, 2002
Dave Landry

On Wednesday, the Nasdaq gapped lower and generally
continued lower throughout the day. This action has it closing poorly and well
below its 50- and 200-day moving averages.

The S&P also sold off very hard. This action reaffirms
the 1180 resistance level.

The VIX continues to hover near multi-year lows. I’d prefer
if it were also stretched 10% or
more (i.e., a CVR III/CVR III Modified) away from this average, but, as Mick once
said, “You can’t always get what you want, but if you try sometimes, you
just might find, you get what-cha need.”

So what do we do? The fact that the S&P sold off hard
after failing to get through resistance, combined with a low VIX, suggests that
the correction is under way. Therefore, look to play both sides but remain
defensive on the long side–stick with issues that have outperformed the market
as of late (e.g., consumer non-durables, auto parts, defense). And, above all,
wait for entries and honor your stops.

Looking to potential setups, Lear
(
LEA |
Quote |
Chart |
News |
PowerRating),
mentioned Monday recently, “faked out” on Wednesday but still looks it
has the potential to resume its uptrend. Just wait for an entry in light of this
action.

Stay On The Trail

On Tuesday, I discussed using a two-bar trailing stop on Alberto Culver
(
ACV |
Quote |
Chart |
News |
PowerRating), a stock mentioned recently. So far, this stop appears to remain
intact (a). One last point, keep in mind that I believe in using discretion when
trading. With that said, a two-bar trailing stop is just one of many ways to
trail a stop. If a stock is volatile and/or close to a two-bar low, I might give
it more room (but, in general, never loosen an existing stop!). On the other
hand, if a stock makes a strong move away from this level, I might tighten even
further. For more on how to use discretion in your swing trades, see my articles
under TM
University (you’re paying for it, you might as well attend!).