Divergent Week

The Dow finished last week up 3.1%, with the S&P down 2.2%, as the institutions continued the sector re-allocation. Money went into basics, oils, and even the golds (with the crisis overseas). The allocation into the basic industry stocks comes from a minimal weighting to a reasonable weighting–all the sheep are following a leader.

From a trading standpoint, you’ll get a chance to buy the retracements in most of these stocks (as you did in Schlumberger three times) if you’re looking for a position trade. The breadth has expanded to the Russell 2000 stocks, and you’ll be able to find many good position setups if momentum continues. We’ll continue to watch our relative strength momentum screen for stocks and keep a close watch on any of the recent leaders that get oversold.

There will be excellent snap-back rallies in some of the techs, like EMC, that are off 15-20% already. Watch for long, tight consolidations on your five-minute charts.

Target Stocks Of The Day  Patterns near highs that could accelerate with continuation entries in the direction of the trend include Bed Bath & Beyond [BBBY>BBBY], Kohl’s [KSS>KSS], Tyco [TYC>TYC], Electronic Data Systems [EDS>EDS], Navistar [NAV>NAV], and Williams Companies [WMB>WMB]. Also, BankAmerica [BAC>BAC] Citigroup [C>C] both reported earnings along with several other banks that are all positive, so I assume they’re going gap up. If they do, you might get a second chance on a pullback.

Pullbacks or consolidations at moving averages with entry above Friday’s close include Texaco [TX>TX] and Omnicom [OMC>OMC]. Two stocks in the bottom-fishing area that showed an increase in institutional interest last Thursday and Friday are Ashland Oil [ASH>ASH] and Core Laboratories [CLB>CLB]. These are probably better as position trades.

Right now (around 8:30 AM ET), the futures are up seven, the Nasdaq generals are all ticking up–the same situation as last week, when we had the sell-off in the S&P and techs and money flowing back into the basics and smokestack stocks. We could get a little more of the same today. Remember, no one is selling out of these stocks, they’re just reducing their very overweighted positions. Institutions can afford to sell a million shares if they have five million; price will drop, and they can go back in and buy. Don’t misread what’s going on here.

Program trading numbers  Buy: 10.8. Sell: 6.06. Fair value: 8.52.

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.