Fear And Greed

  • July 9, 2001
  • Dave Floyd

After
last week’s surprise volatility, despite a holiday shortened week, I
suspect that volatility will be back in force today, especially after the the
bulls took it on the chin as the major indices and tech stocks sold off hard.
Friday’s activity was surprisingly good, shorting most of the morning
rallies proved to be a great strategy. Volume
was noticeably lighter in the afternoon as the indices closed at or near the
lows. Some would argue that this selloff
may be less significant due to the light volume, I disagree.
The markets sold off for three reasons:

  1. They
    were unable to break above resistance technically on the S&P and Nasdaq
    futures after several failed attempts.

  2. There
    is no sign yet that any of the Fed moves is having an impact as companies
    continue to disappoint.

  3. With
    earnings coming over the next week, the optimism that earnings will be
    better is now just a wish.

From a trader’s perspective, I
welcome the “shake-up,” nothing makes hyperactive daytrading more
enjoyable than a dose of fear and greed to really get the volatility going, and
I suspect this week will offer that.

Those of you familiar with my
style and discipline know I am strict about trading with the trend as indicated
on one-minute charts. Trading against the
trend, while a perfectly viable strategy, does reduce your probabilities. The charts below
will illustrate this point quite clearly. 

Notice that on both charts, the
first 15 minutes of trading is clearly in a downtrend, as noted by the downward
sloping moving average. The S&Ps have
rallied up to that average and are consolidating (around 9:45 EST), then
continue lower in the next few bars. The
MWD chart, however, spikes higher, blowing completely through its upper
Bollinger Band. 

Let’s review a couple of
things first:

  1. I
    trade stocks that are highly correlated with the S&P and Nasdaq futures.
    These stocks normally do not deviate too much from where the futures are
    trading. In this case, a major
    deviation. 

  2. The
    violation of a Bollinger Band will typically result in a reversal back into
    the 2 standard deviation price channel.

  3. This
    move in MWD took place on relatively light volume.

With these things in mind, we
have a perfect situation for shorting MWD. The
trigger point was to wait for MWD to consolidate, or at the very least slow the
upward momentum, AND wait for the S&Ps to begin their descent again.
Look for these trades under the right situations and use tight stops.

Covering the short could have
been made at one of two areas:

  1. When
    MWD trades back to the moving average (I chose this one) or…

  2. Covering
    when the S&Ps stopped their downward move shortly after 9:50 EST.

Looking at today’s session,
expect volatility. Currently, the
S&Ps and Nasdaq futures are up a bit, but still below resistance levels. Resistance is seen at 1202 and
1206. The Nasdaq is also just above its
60% level of 1687, with resistance seen at 1701.33.
In terms of stocks to watch for good intraday movement, IBM should prove
to be a good trader.
I suspect this will stir things up a bit and offer some great intraday
trades. 

I have received numerous e-mails
from readers who enjoy the column as well as those who want to get a better
understanding of my trading style. Over
the next few days, I will be offering some more insights as well as ways you can
utilize my commentary that I post on TradersWire.
Currently, I am commenting on specific areas in the S&Ps and Nasdaq
where I expect there to be moves up/down. This
is incredibly helpful for traders like myself, but also a good way for slightly
longer-term traders to optimize entry points by aligning them with market
momentum. TW is an incredibly powerful
tool for traders, and I encourage you to check it out.
My screen name isAs always, feel free to drop me
a question or comment at:  davef@tradingmarkets.com

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