Fear To Greed In A Day And A Half

Inflation was a worry on Friday until the 3:00 p.m. buyer came in to calm the market. But by Monday, inflation was totally forgotten as we exploded once again at the magical 3:00 p.m. hour.

Basics and energies led the way, techs (except for the semiconductors) did nothing, and the Internets continued to pull back. The magnitude of the late-afternoon buying, regardless of it being programs or not, is evidenced by a positive swing of 280 million up volume vs. down volume from 2:20 to the close–that’s strong. Breadth was excellent, as the public was buying anything with a story (and the media is right there to shove them over the cliff).

More important than market trivia is how to make money in this volatility. You do that by focusing on what you see, not all the hype you hear. Yesterday the S&P 500 closed above the high of the low day of three- (daily) bar pullback; it will, of course, accelerate, trading above yesterday’s high. If we gap on the open and trade higher, then pullback to yesterday’s S&P high of 1354.59, it could set up an entry point. If you take positions early, use Friday’s high of 1351.80 as your stop level. If you have stock positions (not SPDRS), tighten your stops if these levels are penetrated.

The QQQs will not get going unless they can trade (and hold) above 108 13/16, having closed yesterday at 107 7/16. They gave no entry yesterday, rising only to 107 9/16 when 107 3/4 was our key level. When you have this kind of volatility, some of your best trades will be generated from long, tight consolidations that break out to the first or second new intraday highs. Keep checking your five-minute charts and focus on high relative strength momentum stocks.

Target Stocks Of The Day  Continuation patterns today include Airtouch Communications [ATI>ATI], American International [AIG>AIG], Best Buy [BBY>BBY], Citigroup [C>C], Gap [GPS>GPS], [MOT>MOT], which gave good entry yesterday and could accelerate today after closing on a breakout of a symmetrical triangle, Solectron [SLR>SLR], and Nextlink Communications [NXLK>NXLK]. Morgan Stanley Dean Witter [MWD>MWD] and Merrill Lynch [MER>MER] also set up nice patterns; if this market is going to continue, these stocks have to go with it.

The energies have been very strong. Three that have set up in consolidation patterns right at their highs (you have to be fast) are Royal Dutch Petroleum [RD>RD], Chevron [CHV>CHV], and Texaco [TX>TX].

Program trading numbers  Buy: 8.62. Sell: 3.82. Fair Value: 6.15.

One cautionary note: Goldman Sachs is a blow out. If you’re operating online or on any kind of DOT machine, you have to be very careful if you’re going to be involved in Goldman Sachs. Make sure you can get your executions immediately. I suggest staying away form the opening, watching it trade for 10-15 minutes; if you can’t get your execution online, you must be able to call a desk.

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.