Defensive Ways To Play A Correction

May 29, 2003
Dave Landry

On Thursday, the Nasdaq opened flat but quickly began to
rally. It found its high by mid-day and generally worked its way lower
throughout the rest of the day. Even so, it still managed to close in the plus
column. And, this was enough to put it at new highs for the year yet again.

The S&P sold off harder after finding its highs.

So what do we do? Nothing much as changed. The indices
remain overbought based on price and short-term average advance/decline
readings. And, they also continue to signs of stalling. This is backed by
weakness and/or stalling action in recently strong sectors such as the
homebuilders and biotech. In addition, there was a (less than 30-day) TRIN Reversal sell
signal on Wednesday. Considering this, I would continue to lighten up on the
long side. And, only consider issues that can trade contra to the indices such
as gold or energy stocks. On the short side, you might look to nibble in the
major drugs which appear to be rolling over. For the aggressive, you might look
to play the index shares (for a correction) or areas that have failed to keep up
with the market (i.e. showing signs of distribution) such as life
insurance.Â

Looking to potential setups, Encana
(
ECA |
Quote |
Chart |
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PowerRating), in the
strong independent oil & gas sub-sector (a), looks like it has the potential
to resume its uptrend out of a Trend Knockout.