Corrective Action

October 28, 2002
Dave Landry

On Monday, the Nasdaq gapped higher on the open but quickly reversed and
sold off hard. It then worked its way higher throughout mid-day but resumed its
sell offÂ for
most of the afternoon. This action has it closing poorly.

The S&P closed poorly after tailing above its recent
trading range.

The VIX reversed intra-day after hitting new (relative) lows and
stretching away from its 10-day moving average. This action sets over several
CVR sell signals (including a CVR III-Modified).

So what do we do? The fact that the S&P reversed after
breaking out of its trading range (i.e. a false breakout) combined with action
in the VIX suggests that a correction may be underway. However, based on the
choppy action we’ve seen lately, I really hate to make any big directional bets.
Considering the above, use caution on establishing new longs (i.e. wait for
entries and/or positive sector action) and look for opportunities on the short
side. Above all, continue to keep it light.

Looking to potential setups, telecom has been extremely
strong as of late. With that said, Inter Tel
(
INTL |
Quote |
Chart |
News |
PowerRating) looks like it has the
potential to rally out of a cup and handle/Bow Tie.

Be Careful Of Gaps

Use caution when trading gaps since a gap opening can often
be the high (or low) for the day. Biogen
(
BGEN |
Quote |
Chart |
News |
PowerRating), mentioned
recently, did this on Monday: It gapped to its exact high (a) and quickly
reversed (b). For more on trading gaps, see my article “Opening
Gaps: Trade ’em, Fade ’em or Ignore ’em” under TM University. One last
point, keep an eye the pre-market index futures (Globex) for a “heads
up” on potential gaps.Â